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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 ..... . R. Shastri, AGP for the Respondent-State. Nupur Desai, Aanchal Jaswani, Ginni Ahuja i/b. M/s.Markhand Gandhi, advocates for the applicants in Chamber Summons No.156 of 2018. Mr. Sandeep Karnik, advocate for the applicants in CHSWST No.193 of 2018 and CHSWST.No.81/2017. Mr. Ramchandra Lothikar, Sr. P.I, Mr. Pawar API(EOW) Mr. K. Suryakrishnamurthy Competent Authority. JUDGMENT : (Per Bharati Dangre, J) 1. A significant and axial issue involved in the two writ petitions before us revolve around the National Spot Exchange Limited (NSEL) and the parties are diversificated on the issue as to whether the said establishment is a Financial Establishment or not, and whether it has accepted the deposits. Both the Writ Petitions are filed by the petitioner which is a listed Company registered under the Companies Act, engaged in the business of developing and selling technology products of facilitating trading on exchanges such as stock exchange and commodity exchange and it claims to have more than 63,000 shareholders and more than 800 employees. The petitioner claims to be a leader in Financial Technologies market and has developed a software by name "ODIN" and it is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onic trading platform for spot contracts in various commodities on a compulsory delivery basis. It is stated that NSEL commenced its operation in October 2008 in accordance with the Notification dated 5th June 2007 issued by the Department of Consumer Affairs, Government of India under the FCRA, 1952, by which "All forward contracts of one day duration for the sale and purchase of commodities traded on" NSEL were exempted from the purview of Forward Contract Regulations Act, 1952 (for short 'FCRA'). It is the case of the petitioner that the NSEL operated an Exchange in accordance with the Rules, Regulations and byelaws and in its terms, the brokers became the members of the exchange and traded in commodities on the exchange platform on their own account and on behalf of their clients and the brokers were also bound by the byelaws and Rules of Exchange. The petition further proceeds to state that these T+2 and T+25 contracts which were traded together, were also referred to as 'paired contracts' where the buyer/investors would enter into a contract to buy a commodity with T+2 delivery cycle and simultaneously buyer/investor would also enter into a contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in fact, the EOW Mumbai has already registered a separate FIR under the FCRA against NSEL and the brokers for acting in breach of the provisions of the Act. (d) The definition of 'Financial Establishment' must by necessary implications exclude an Exchange/future market to avoid conflict with the legislative powers of the Parliament under Entry 48 of List I of VIIth Schedule of the Constitution of India. (e) Admittedly, the petitioner has not received any part of the sum of Rs. 5600 crores alleged to have been received by NSEL as the alleged 'deposits' and the properties of the petitioner are not acquired out of the alleged deposit purportedly collected by NSEL. (f) The assets/property is already attached by the respondent are sufficient to cover the amount currently outstanding which is about 4822 crore. 4. The petition, has in detail, highlighted the trading process on NSEL's exchange platform and the petitioner has also tendered a compilation of sample documents generated in the course of transactions on NSEL's trading platform. To support the submission that NSEL was only an online platform where willing buyers and willing sellers purchased and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and the permissibility to attach its software "Odin" and the attachment of receivables from Odin, the petitioner has raised a challenge that in terms of Section 4 of the MPID Act, the Government ought to have first attached and liquidated the assets acquired out of the deposits and it is only after liquidating such assets, if there was a short fall in repaying the alleged investors, then the assets of any other person, including the petitioner, would have been attached. The impugned notifications are basically assailed on the ground of misreading of the existing provision of Section 4 of the MPID Act and it is prayed that it is either necessary to read them down or strike down the same as ultra vires. The said relief is sought to be justified on the ground of the vagueness and possible area of misinterpretation leading to the gross abuse and misuse of the latter portion of clause (ii) of subsection (1) of Section 4 i.e. "such other property of the Financial Establishment or the promoter, Director, Partner or Manager or members of the said Financial Establishment as the Government may think fit", being susceptible of a misuse. Because of the words "such other property" inste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers of NSEL who acted as brokers on their behalf. Mr.Nankani would invite our attention to the mechanism in place with NSEL which included the different elements i.e. the brokers (registered members) and the client or traders (socalled investors/buyers). According to him, the brokers and the clients or traders had an independent agreement between them and the clients originally entered into T+2 contracts and thereafter, in T+25 contracts reversed the trade so as to receive monies from the seller in T+2 contracts which expired on 25th day under the T+25 contract, meaning thereby that the seller under the original contract of T+2 was buyer under the T+25 contract. He would submit that the price/amount under T+25 contract was higher than the price/amount under the T+2 contract and the difference being the business profit for the trader/seller under the T+25 contracts. He would further demonstrate by stating that it is the original seller (who was the buyer under T+25 contract) who failed to return the money received under T+2 contract on expiry of 25th day, and therefore, he is the defaulter and there are according to Mr.Nankani, in all 24 such original sellers who received or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yers on T+2 date with an obligation to make payment on T+25 date who had defaulted and, therefore, they would become the financial establishment well nigh and he would submit that the notification issued on 31st March 2017 issued by the respondent has characterized most of the sellers as Financial Establishment. The learned senior counsel would also further submit that despite the Forensic Audit by EOW, Mumbai establishing the complete trail of further diversion of funds by the 24 defaulters to their associated persons and entities, respondent has not attached the properties of each of the beneficiaries equivalent to the monies that has been traced and without first exhausting the properties of those persons to whom the alleged deposits have been traced, the respondent has illegally attached the properties of the petitioner - Promoter of NSEL. He would further submit that the issue whether NSEL has received deposits, is a jurisdictional issue. 7. Mr.Nankani has elaborated his argument that NSEL is not a financial establishment and he would refer to the investigation of the EOW in this regard and submit that the NSEL has acted only as a passthrough or a platform and could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract the provisions of the MPID. He would also place heavy reliance on the report of the auditor appointed by the Economic Offences Wing to trace out the trail of money which has been deposited by the 24 sellers and their brokers and he submits that the auditor in his report dated 24th February 2018 has clearly reported the names and amounts due from the 24 defaulters to whom the complete fraud amount of Rs. 5600 crore can be traced. He would submit that the report of the auditor supports the submission of the petitioner that NSEL is a passthrough and did not receive any money in its account. In this background and surrounding circumstances, Mr.Nankani would urge to grant the relief as prayed in the petition. 9. As against the said submission advanced by the petitioner, we have before us the affidavit in reply filed by the State Government and also the submission advanced by learned senior counsel Shri Dada in support of the State Government. He has placed reliance on the affidavit filed by Shri Prabhakar Loke, ACP and Chief Investigating Officer NSEL, Economic Offences Wing dated 29th June 2018. The said affidavit, according to him, deals exhaustively with the challenge of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that money when received was given to the purported sellers, and when repaid was given to the original buyer, is totally misleading assertion and on the other hand, his submission is that money was received by NSEL from investors and it was passed on to borrowers by NSEL and the entire transaction was a financial transaction. Shri Dada would thus emphatically submit that NSEL squarely fall within the term 'Financial Establishment' as contemplated under the MPID Act and by relying on the chargesheet, he would advance a submission that the actual transaction between NSEL and borrowers are not supported with actual delivery of goods and in many cases, the accounts of the NSEL and borrowers did not match with each other due to unilateral bogus entries made by either of the parties to suit and accommodate each other. He would further submit that the investigation has also concluded that the physical delivery of the commodities has not been checked and there was no control over the stock lying in warehouses and in fact, the entire financial mishap has occurred due to the collusion between NSEL, its owners, Directors, management, sellers, borrowers and others and it is a cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired by such financial establishment either in its own name or in the name of any other person from out of the deposits collected by the financial establishment. He would submit that if it transpired that such money or other property is not available for attachment or not sufficient for repayment of deposits, such other property of the said financial establishment or the promoter, director, partner or manager or member of the financial establishment can be attached by the State Government. The learned Senior counsel would thus submit that the basis of attachment of the property of the Director, Promoter, Partner or Manager of the financial establishment is to fasten the liability on the promoter who has been defined under the Companies Act to include a person who has control over the affairs of the Company, directly or indirectly or a person in accordance to whose advise, directions or instructions, the Board of Directors of the Company is accustomed to act. According to him, this provision enables to fasten the liability on the persons 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptualized the idea of an Indian common market and it was an outcome of a policy decision to create a common nation wide market for commodities. NSEL came into being to fulfill a vision of Government to create common Indian market for trading of commodities. It came into existence as one of the several subsidiaries of FTIL which holds 99.99% of its shares. Apart from the NSEL, the NCDEX Limited and National APMC were also established for fulfilling the dream project of an Indian Common Market. 13. The National Spot Exchange Limited is the India's first electronic commodity spot exchange that was established with a vision to create a 'single market' across the country for both the manufactured and agricultural produce. It is a National Level Institutionalised and demutualized Electronic Spot Exchange aimed at creating an unified common Indian market for various commodities. The object of NSEL is to enhance farmers price realization and reduce consumer paid 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket Committee (APMC Act) to the NSEL. The Forward Market Commission was appointed as a designated agency to regulate the Spot Exchanges. The Spot Exchange was mainly regulated by the three main regulators i.e. (i) the State Agriculture Marketing Board, (SAMB) regulating the transaction involving the farmers sale of agricultural commodities on electronic platform, (ii) Forward Market Commission (FMC) which regulated all the trade where netting of intraday transaction in the commodities contract is followed by Exchange and (iii) Warehouse Development Regulatory Authority (WDRA) which covers the aspect of negotiability of warehouse receipts. In the year 2012, the designated agency for implementation of the notification came to be replaced by Forward Markets Commission, Mumbai". 14. NSEL was granted conditional exemption from applicability of the Forward 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Finance, therefore, rescinded notification dated 5th June 2007 with immediate effect. II The FIR filed and the subsequent invocation and application of provisions of MPID Act against NSEL. 17. On 30th September 2013, one Mr.Pankaj R. Saraf lodged an FIR (C.R.No.216 of 2013) with the MRA Marg Police Station. In his statement, he stated that he was an investor in Traders contract offered by the NSEL through its broker and he was regularly trading in T+2 and T+25 contracts and on 20th July 2013, he was informed by his broker that NSEL had issued press release on 25th July 2013 based on a circular issued by the Department of Consumer Affairs requiring NSEL to submit an undertaking that new contracts will not be launched until further instructions and that the existing contract should be settled on due 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 settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and known as Maharashtra Protection of Interests of Depositors in Financial Establishments Act, 1999. The MPID Act 1999 was brought into force from 21st January 2000 and the said enactment was necessitated in the backdrop of the fact that there was a mushroom growth of financial establishments in the State and these establishments were in the process of grabbing money received as deposits from public and thereby attracted the middle class and poor on the promise of unprecedented high attractive interest rate or rewards and without any obligation to refund the deposit to the investors on maturity failed to do so. Many of such financial Establishment defaulted to return the deposits to the investors and at times, the deposits ran into crore of rupees causing great public resentment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 2(c) is n inclusive definition and it is deemed to have always included any receipt of money or acceptance of any valuable commodity to be returned after a specified period or otherwise, either in cash or in kind or in form of a specified service with or without any benefit in form of interest, bonus, profit or in any other form. 19. In order to ascertain whether NSEL had received any deposit to bring it within the purview of a financial establishment, we have carefully considered the rival submissions advanced by the learned senior counsels appearing for the petitioner and the State. Mr.Nankani has placed before us the entire gamut of operations carried out by NSEL and he has explained the various stages involved 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 Byelaws known as the 'byelaws of National Spot Exchange Limited, Mumbai' which came into force with effect from June 2008. The byelaws governed its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng member of the Exchange who has the right to clear transactions in commodities that are executed in the trading system of the Exchange. 2.27 Client means a person who has executed an agreement with a member of the Exchange for dealing through such member in commodities permitted on the Exchange. 2.33 Days of tender mean the days on which relevant delivery documents and certified warehouse receipts are permitted to be presented to the Clearing House of the Exchange. 2.35 Delivery order means an order issued by a seller in the prescribed form in favour of the Clearing House offering delivery of goods at one or more permitted delivery centres 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 cooperative 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause 3.1.2. The byelaws were made applicable to all the members and participants of the exchange, authorized persons, approved users, clients and all entities involved in trading, clearing and settlement of transactions to the extent specified therein. The limitation of liability of the NSEL was made very clear in clause 3.7 of the said byelaws. 3.7 LIMITATION OF LIABILITY The Exchange shall not be liable for any activities of its members or of any other person, authorized or unauthorized, 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 ByeLaws 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ood or being required to make good such loss or damages (or any part thereof) to such party or person, the Exchange shall be entitled to recover the amount. Dealing in commodities specify the nature of transaction taking place on the platform of NSEL and it set out that the exchange shall provide its trading platform for spot trading in multiple commodities, multiple verities, which shall be consisting of different types of graded unprocessed, semiprocessed, processed agricultural commodities, including those notified commodities by different State Agricultural Marketing Board/Authorities as well as metals of different specifications including precious metals like gold and silver etc. The following stipulations in the byelaws 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roved, 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 sellingout as per the Business Rules of the Exchange, together with a penalty as prescribed by the Managing Director or such committee for those failing to give or receive delivery. 4.24 Any member of the Exchange transacting in any contract and basis varieties that are not specified by the Board shall be liable to be dealt with under ByeLaws 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 nonmembers, including orders from registered nonmembers for execution of transactions in commodities. Members shall preserve the records of registered nonmembers orders for transactions‟ for each registered nonmember separately with the time and date of receipt of order, details of executed transactions for each registered nonmember and books of accounts relating to the same, for a period of three yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e responsible for the performance of such contracts. If any party to such contract defaults in respect of his financial obligations or fails to deliver goods on maturity of the contract, the defaulting member shall be liable for appropriate disciplinary action by the Relevant Authority and his contract will be closed out by the Relevant Authority in accordance with the ByeLaws, Rules, Business Rules and Regulations or notices, or orders issued thereunder. The Exchange shall then be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 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, excep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les of National Spot Exchange Limited, Mumbai which set out the manner in which the exchange would be managed and the functions of various committees constituted under the byelaws of the exchange, including the Membership Committee, Trading Committee, Clearing House Committee, Vigilance Committee etc. The qualifications and 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 byelaws set out the rights and obligations of the brokers visàvis 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 byelaws of the NSEL. We have perused the byelaws of NSEL and from the said byelaws, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing order. 25. The Exchange specified the procedures and operations for every clearing member and every member was required to open their clearing and settlement account with the exchange, and 9 clearing banks were appointed by the exchange for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Buying Broker / member informing him that the bought quantity of the commodity was allocated to him, from the particular warehouse receipt. 8. NSEL would then send the Buyer's details to the selling Trading Member & the selling Trading Member would arrange for the nonmember 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 nontra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere passthrough platform between seller and buyer and no amount was received by NSEL as a deposit. The nature of transaction which was clearly available to those who were trading 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of transactions and we would like to reproduce one such specimen : WAY2HEALTH COMMODITIES PVT LIMITED Directors Authorized Signatory SANDHYA Dealing Office: 3rd FLOOR, HINCON HOUSE TOWER B, 247, PARK, LBS MARG, VIKROLI (WEST), MUMBAI-40083 Regd. Office: #14, FRONTLINE GRANDEUR, WALTON ROAD, BANGLORE - 5600 001 Web Site: www.waywealth.com Email: [email protected] Corp. Office: 3RD FLOOR, HINCON HOUSE, TOWER-B, 247 PARK, L.B.S. MARG,VIKHROLI (W). MUMBAI, MAHARASHTRA 400083 INDIA Tel. MEMBER: National Spot Exchange Limited, NSEL Member Code:14600 To, VOSTOK FAREAST SECURITIES PRIVATE LIMITED PGWM0297 ORION HOUSE 4TH FLOOR, 12 RAMPART ROAD FORT MUMBAI Pincode:400023 INDIA Pan # AAACV3561C Contract No. MS/D/3143/366 Date : 19/07/2013 Dear Sir/Madam, I/We have this day done by your order and on your account the following transactions: To be Stamped as Per the provisions applicable under the relevant Stamp Act. BOUGHT FOR YOU SOLD FOR YOU Order No. Trade No. Trade Time Quantity Price Value Rs. Brokerage Total Amount Rs. Contract Specifications Quantity Price Value Rs BrokerageTotal Amount Rs. 0000119 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rules. Terms & Conditions specified by National Spot Exchange Ltd. (NSEL). The client shall be responsible to comply or appoint the member as his agent to comply with the requirements of Sales Tax/VAT/APMC Cess. The client shall issue the commercial as well as applicable tax as well as excise invoice and valid sales tax certificates/declaration forms / and APMC Cess payment invoice copy as may be applicable, the buyer for compliance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 the sell order through his broker. The price and quantity is decided by the trader and the details are entered through his broker. Post the sell order, a trade is executed between a buyer and a seller for contract of a particular commodity at the price displayed. The screen would then reflect the balance quantity. A confirmation is also recorded on the screen. It can thus be seen that the willing buyer and seller come on a platform, they trade through their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F 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 somewhere in these transactions and at the end, when a show cause notice came to be issued to the NSEL by the Central Government, it was on the basis that the squaring off did not take place on the same day and all outstanding positions of the trade at the end of the day did not result into delivery. After 31st July 2013, 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 squarin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt' 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 underlying commodities is guaranteed by NSEL and goods have to be compulsorily weighed at the designated weigh bridge and it will be monitored and certified by the warehouse supervisor. He was also aware and conscious of the notification dated 5th June 2007 where the Forward Market Commission was appointed as designated agency. It is relevant to note that his statement contains the following averment. "Other presentations which are available on the website of NSEL also reiterate representations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Byelaws, 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, and transmission of documents, payments, payments and certified warehouse receipts amongst the trading cumclearing members and institutional clearing members of the exchange. Based on the above, it was clear that it was the exchange which was responsible for approving and designing the warehouse for making and receiving deliveries. Further, a review of the Bye laws also confirmed that the certified warehouse receipt which is issued by the exchange is an actual proof of ownership of the underlying commodities. He thus alleg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lp the activity of buying and selling of a commodity, paying cash for and receiving goods on the spot. In the chargesheet, it is stated that the important feature of any such exchange is that it has to stand guarantee subject to its byelaws 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 chargesheet 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 warehouse receipt that is used for electronic trading. After making a reference to the operations of the NSEL, the allegation against NSEL in the chargesheet is to the following extent : "Not only did NSEL permit investors to participate in these contracts but in fact NSEL actively encouraged and induced investors to enter into such dual transactions. This active inducement was not just by highlighting the possible benefits available due to the price differential but also by providing economic rationale to investors by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t : "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 in these companies grew substantially, they did not honour their commitment and thereby caused wrongful loss to the tune of Rs. 2.2 crores to the complainant and approximately around 5600 crores to the other investors numbering more than 13000". Further, the details of accused person/defaulters identified and amount secured by attachment also finds place along with the chargesheet and this includes the 18 defaulters. Perusal of the chargesheet disclose that on investigation into the affairs of NSEL, even the EOW has no doubt in its mind that NSEL was operating as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Proteins Pvt.Ltd, ARK Imports, LOIL Health Foods Ltd, LOIL Overseas Foods Ltd, LOIL Continental Ltd, PD Agro Processors Pvt. Ltd, Lotus Refineries, Juggernaut Projects Ltd, Top Worth Steel & Power Pvt.Ltd, Metkore Alloys & Industries Ltd, White Water Foods Pvt. Ltd, NCS Sugars Ltd, Namdhari Food International Pvt Ltd, Shri Radhey Trading Corporation Pvt. Ltd, Spin Cot Textiles Pvt.Ltd, MSR Food Processing, Sankhya Investment, Yathuri Associates, Aastha Minmet India Pvt.Ltd, Brinda Commodity Pvt.Ltd. h. During the course of investigation it is revealed that the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 associated persons and entities and it is an allegation of the learned Senior counsel Shri Nankani that the respondents have not attached the properties of each of the beneficiaries equivalent to the monies that have been traced to them and without exhausting the said properties of the persons to whom the alleged deposits have been traced, the respondents have straight way approached the petitioner in the capacity as promoter. Mr.Dada has strenuously urged before us that the NSEL had received the commodities and issued a warehouse receipt which was an evidence of a deposit of valuable commodity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 trading of commodities between buyers and sellers through brokers representing them. It also makes a reference to the exemption notification and refers to the freezing order passed by the Government. Exhaustive reference has been placed on the Grand Thorton report where the FMC had suggested the merger of FTIL and NSEL. The Apex Court also makes reference to the chargesheet filed by the EOW Mumbai on 6th January 2014 against the Managing Director and CEO of NSEL as well as other defaulters and considered the charge that the employees of NSEL in exchange of monetary kick backs had colluded with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 : By unilaterally closing down the exchange the said Financial Establishment defaulted in repayment of approximately Rs. 5600 crores which was due to be paid to approximately 13000 investors. Since the money collected by the said Financial Establishment from the investors falls under the definition of 'deposit' as per Section 2(c) of the MPID Act, the provisions of MPID Act are applicable to the present case. Since, the Financial Establishment has accepted the money from the investors, it falls under the definition of "Financial Establishment" as per section 2(d) of the MPID Act. The provisions of the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 attached along with receivables like interest, dividends, and linked bank account into which receivables are deposited from the properties of M/s.63 Moon Technologies as per the schedule. It is this notification which is challenged by the petitioner apart from the ground that NSEL is not a financial establishment since it has not accepted the deposit also on one another ground i.e. that the power exercised by the State is malafide since the audit conducted by EOW do not trace any money trail to the petitioner. Another ground for assailing the said notification is that the EOW had already attached the properties worth Rs. 8,548 crore and those pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 affidavit proceeds to state as under : D N. K. Proteins Ltd, a group company after becoming member of National Spot Exchange Ltd. Fabricated and forged the commodity receipts and traded in the national platform of National Spot Exchange Ltd. All the defaulters have caused the total loss of 5600 crores rupees to 13000 depositors out of which the group company 'N. K. Proteins Ltd.' has rupees approximately. 'N. K. Proteins Ltd. Is the biggest defaulter among all the defaulters. H That the aforesaid act of the 'N. K. group has caused ruination, miseries and bankruptcy and insolvency and hardships to large number of persons. Total 13000 persons have suffered and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 Rs. 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 entering in to sale transaction on the platform of National Spot Exchange, it gets Rs. 1,10,00,000/. In fact there are no goods at all. Then, the N. K. Group have created other commodities in second transactions by paying out the margin money. The company would, not suffer any loss and would have the money on hand of Rs. 1 crore without nay security for these many number of days. The instances of the fraudulent activities are manifold and multifold and the same would be further presented in details at the time of hearing of the present Writ petition. For these reasons, the present Writ Petition may not be entertained and the same may be dismissed. 35. The Gujarat High Court by its order dated 29th March 2017 refused to intervene o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of MPID Act are violative of Articles 14 and 19 of the Constitution and also violate Article 300A of the Constitution on the other hand and the same are liable to be struck down. We have carefully considered the submission advanced by Shri Seervai. He has submitted that Section 4 of the MPID Act which is a power to attach properties on default of the return of the deposit has to be carefully construed. According to him, the said section is in two parts and the power under the said section is to be exercised by the Government where any financial establishment is acting in a calculated manner detrimental to the interest of defaulters and Shri Seervai has submitted that the section has to be read into two parts, the first part is where the Government is satisfied that the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e MPID Act is exproprietary 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 and he will be divested of the ownership and title of the untainted property despite there being no knowledge, any culpability, and no involvement in any wrongful act by any financial establishment or any adjudication thereof establishing that the said property has been acquired from or out of the deposits of any such financial establishment. In such a contingency, the untainted property of the promoter would result in the promoter divesting of the property in favour of the State in terms of Section 4(2) of the MPID Act without any provision of compensation or public purpose in attaching the said properties. According to the learned Senior counsel, this would amount to confiscation of the property without the owner being guilty of any offence and it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 assailed on the ground of legislative competency of the State legislature. The Full Bench of the Madras High Court examined the said enactment through a Full bench and upheld the said enactment, which contains paramateria provisions of the MPID Act and the challenge in regards to the validity with reference to the principles of natural justice have been answered by the Full Bench in para nos.21 and 22 to the following effect : 21. The power conferred under Section 3 on the authority to pass ad interim order of attachment of money or any other property alleged to have been procured either in the name of the financial establishments or in the name of any other person, from and out of the deposits collected by the financial establishments or if it tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amount of property attached, which is more than the amount required for repayment to the depositors and then empower the Competent authority to bring the property to auction sale and then distribute the sale proceeds equitably, satisfies the principles of natural justice. As regards the arguments that the properties of the innocent third parties were attached without giving them an opportunity, the Full Bench observed that the innocent parties are entitled to approach the Special Court after satisfying their bonafide and it observed the following effect : For their any hardship in the interregnal period, the answer is that when a general evil is sought to be suppressed some martyrs may have to suffer, for the legislature cannot easily make meticulous exceptions and it has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 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 citizens between 60 and 80 years, widows, handicapped, driven out by wards, retired government servants and pensioners, and persons living below the poverty line constituted the bulk of the depositors. Without the aid of the impugned Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost 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 enactment of the MPID Act. In Baskaran (supra), the Hon'ble Apex Court has noted that there is a little variance in the provisions of the Tamil Nadu Enactment and the MPID Act but on a larger platform, the Apex Court had observed that a systematic conspiracy was effected by certain fraudulent financial establishment which have not only committed fraud on the depositors but also siphoned off or diverted the depositor's funds malafide would amount to abuse of faith of the depositors who have innocently deposited their money with the former for higher rate of interest. The Apex court refused to take note of the submission that the provisions of the enactment enacted by the State legislature for protection of interest of the depositors is violative of Article 14, 19(1)(g) or 21 of the Constitution since the said enactment was looked at as salutary measures to remedy the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to the excessive attachment is concerned, it is to be noted that in a Notice of Motion No.281 of 2018 and 397 of 2018 along with Chamber Summons No.155 of 2018 and 156 of 2018, we had passed a detailed order on 24th October 2018. It is on this day we have admitted the writ petition in order to test the validity of the MPID Act, 1999 and also the challenge to the attachment of the properties of the petitioner by taking recourse to Section 4 of the Enactment. By our detailed interim order, we had expressed that the notification issued by the State Government purporting to attach the properties of the petitioner Company in the year 2018 is in excess of the defaulted amount and we have recorded our reasons before concluding so. This order was assailed before the Hon'ble Apex Court and the Apex Court refused to interfere in the said order. The petition is then taken up by us for hearing on the main issue about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 provisions of the MPID Act at that stage. In such circumstances, the judgment relied upon by the state to advance its submission that the issue about the applicability of the provisions of the MPID Act to the NSEL is foreclosed, cannot be accepted. 41. The petitioner has posed a challenge to the various notifications issued by the Home Department of the State of Maharashtra in exercise of power under Section 4 of the MPID Act, thereby attaching the properties of the petitioner in the capacity as promoter. It is the specific contention raised in the petitions that the EOW has also attached the properties of various defaulters. The impugned notifications which have been assailed before us relate to the action of attachment of the property of the petitioner to the FIR being lodged by Mr.Pankaj Saraf on the basis of which the provisions of MPID Act were invoked and applied. The notification proceeds on a foot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are in excess of the defaulted amounts. The State proceeded under the MPID Act and properties of the petition came to be attached on the gospel belief that NSEL is a financial establishment and the petitioner being its promoter and therefore, when the assets of NSEL are not sufficient to meet the demands of the investors, the Government turned its nelson eye to the petitioner. The entire exercise was carried out on foreclosed premise that NSEL is a financial establishment. The perusal of the FIR by Shri Saraf as well as the chargesheet filed in the relevant C.R on the contrary, depicts a different scenario. The audit report conducted is a part of investigation clearly point out a finger to the sellers/defaulters and disclose that it is these defaulters who have utilized the amount received by them for some other business purpose and the audit reports fix the liability pertaining to trade obligation on the said defaulters. The unstarred question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeded 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. The fact or the facts upon which the jurisdiction of a Court, a Tribunal or authority depends on and which is referred to as 'jurisdictional fact', the Court exercising the power must be satisfied that such a jurisdictional fact exists and it can then assume jurisdiction to decide the issues revolving around the said fact and if existence of such a fact is lacking, the Court or the authority may restrain itself from exercising its power. The existence of a jurisdictional fact is Investigating Agency sine qua non to the assumption of jurisdiction by a Court or Tribunal. The respondent authorities has proceeded on the assumption that NSEL is a Financial Establishment and the entire course of action that followed by issuing notification under Section 4 attaching the properties and NSEL is a fall out of an assumption that it is dealing with an Financial Establishment. The Apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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