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TMI Blog2014 (2) TMI 1375X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 2150-2013.doc the Act. This being the position, Defendant No. 3 (depository participant) could not be expected to act on any pledge, to which Defendant Nos. 1 and 2 (the beneficial owners) were parties. So also, Defendant Nos. 4 and 5 (the depositories) could not be prevented from effecting transfer of the shares on behalf the beneficial owners. This court, in the case of JRY INVESTMENTS (P.) LTD. VERSUS DECCAN LEAFINE SERVICES LTD. [ 2003 (3) TMI 601 - HIGH COURT OF BOMBAY ], considered the rights of an owner of shares who had transferred the same with intention of creating security, to prevent dealing in such shares by the transferee in the event of failure of consideration for such security. A similar argument, as in our case, was advanced that the transferee had no title to pass on - In Jry Investments Case, this court on the basis of the analysis of the provisions, held that the transfer could not be prevented. The ratio of that case would apply to the facts of our case as well. In the absence of any pleading that the transferee had notice of any defect in the title of the transferor, it is difficult to accept the case suggested by the learned Counsel on the basis of some re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and 2 have accounts) from transferring any of the sat 2/17 nm (l) 2150-2013.doc balance shares lying in the depository accounts of Defendant Nos.1 and 2. An interim injunction is also sought against Defendant Nos.4 and 5, who are the depositories in respect of the said shares, from transferring any of the balance shares lying in the DP accounts of Defendant Nos.1 and 2. 3 It appears that since the passing of an ad-interim order on the Notice of Motion, certain further shares have been transferred by Defendant No.3 on behalf of Defendant Nos.1 and 2, whilst some other shares lying in the DP Accounts of Defendant Nos.1 and 2 have been confiscated by Defendant No.3. Having regard to these transactions executed since the filing of the suit, the Plaintiff has amended the plaint as also the present Notice of Motion seeking in addition to the original prayers an interim restraint on Defendant No.3 from making pay-ins of shares sold by Defendant No.3 through the Stock Exchanges and clearing corporations on behalf of Defendant Nos.1 and 2 and directions to Defendant Nos.1 to 3 to deposit in this Court the sums received from sale of shares in excess of the liability owed by the Plaintiff t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecution of as supplementary schedules(s). Such Supplementary Schedule(s) would be deemed to form part and parcel of this Agreement and would not require execution of a fresh agreement. Such change in the Schedule would, inter alia, include substitution/replacement with fresh securities or additional securities. 7. In case of expiry of the date or in case of any other default, the lender shall have full rights to sell, dispose of or otherwise deal with the said securities on such terms and price that the lender may think fit and apply the net proceeds towards satisfaction of the Loan amount outstanding the Borrower along with interest, charges, etc. 8. Any default in payment of dues would entail an interest charge of 24% per annum on the entire dues of the lender remaining outstanding, without prejudice to the lender's other rights available as per this agreement or otherwise under the law. 12. The lender will keep the rights to utilise the provided securities/shares, which can be used as collateral for his own margin sat 4/17 nm (l) 2150-2013.doc purpose. 5 There is no dispute that the shares purportedly pledged by the Plaintiff with Defendant Nos.1 and 2 have been duly transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laintiff that on 28 October 2013, a further 42,000 shares valued at approximately ₹ 90 lakhs were sold by Defendant Nos.1 and 2. (This fact, however, was not mentioned in the suit as originally filed.) 12 It is, thus, the case of the Plaintiff that in addition to the sum of ₹ 2 crores received towards return of loan, the Defendants had already received a sum of ₹ 354.50 lakhs, i.e. ₹ 1.76 lakhs (sale of 78,000 shares) plus ₹ 88.50 lakhs (sale of 40,231 shares) plus ₹ 90 lakhs (sale of 42,000 shares) from the sat 6/17 nm (l) 2150-2013.doc sale of total of 1,59,230 shares against their outstanding of ₹ 3 crores. It is, thus, the case of the Plaintiff that the entire amount of the two loans aggregating to ₹ 5 crores has been returned together with interest by the Plaintiff and that the Plaintiff was, in the premises, entitled to re-transfer of the shares held as a security by Defendant Nos.1 and 2. 13 In these premises, the Plaintiff filed the present suit and applied for ad-interim reliefs in the Notice of Motion. It is the case of the Plaintiff that the Plaintiff made an exparte application on 29 October 2013 at 11.00 a.m. for an ad-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant No.3 towards squaring off the shortfall in the margin of Defendant Nos.1 and 2. 16 On the basis of the aforesaid facts, the Plaintiff prays for an interim restraint against Defendant No.3 from transferring further the shares purportedly confiscated by him and to bring into the Court the entire sum realized on the sale of shares effected between 29 and 30 October 2013. 17 Mr. Chinoy, the learned Senior Counsel for the Plaintiff, submitted that the suit shares were pledged with Defendant Nos. 1 and 2 for securing the loan liability owed by the Plaintiff to Defendant Nos. 1 and 2; that the loan liability having been fully discharged, the Plaintiff was entitled to re-transfer of the balance shares held by Defendant Nos. 1 and 2 as a security; Defendant Nos. 1 and 2 were incapable of transferring to Defendant No. 3 any higher right than they themselves possessed in the shares offered as security; and Defendant No. 3 was not, therefore, entitled to sell or transfer the shares. Mr. Chinoy submitted that Defendant No. 3 had knowledge of the transaction between the Plaintiff and Defendant Nos. 1 and 2, and therefore, of the rights of the Plaintiff as pawnor with respect to the shares an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aintiff is bound to compensate. Now, this claim of Defendant Nos. 1 and 2 is in the nature of special damages. Prima facie there is nothing to indicate that this F. O. position and the likelihood of any resultant loss was actually conveyed to the Plaintiff so as enable Defendant Nos. 1 and 2 to claim damages towards the same from the sat 10/17 nm (l) 2150-2013.doc Plaintiff. This being the position, it can be safely concluded at least at this prima facie stage that as between the Plaintiff and Defendant Nos. 1 and 2, the latter are bound to retransfer the shares to the Plaintiff. 21 The real question, which arises in the matter, is whether Defendant No. 3 is bound by this alleged pledge and therefore, not entitled to deal with the security. There I am afraid the Plaintiff is on a shaky ground. The subject shares were admittedly dematerialized and held in a fungible form. The shares were admittedly transferred by the Plaintiff to Defendant Nos. 1 and 2 (may be for creating a security) and were recorded in the name of Defendant Nos. 1 and 2. Under Section 10 of the Depositories Act, 1996 ( the Act ), whilst Defendant Nos.1 and 2 were the beneficial owners of the shares, Defendant Nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the pledgor and the pledgee. (6) The entry of pledge made under sub-regulation (3) may be cancelled by the depository, if the pledgor or the pledgee makes an application to the depository through its sat 12/17 nm (l) 2150-2013.doc participant: Provided that no entry of pledge shall be cancelled by the depository without prior concurrence of the pledgee. (7) The depository on the cancellation of the entry of pledge shall inform the participant of the pledgor. (8) Subject to the provisions of the pledged document, the pledgee may invoke the pledge and on such invocation, the depository shall register the pledgee as beneficial owner of such securities and amend its records accordingly. (9) After amending its records under sub-regulation (8) the depository shall immediately inform the participants of the pledgor and pledgee of the change who in turn shall make the necessary changes in their records and inform the pledgor and pledgee respectively. (10) (a) If a beneficial owner intends to create a hypothecation on a security owned by him, he may do so in accordance with the provisions of sub-regulations (1) to (9). (b) The provisions of sub-regulations (1) to (9) shall mutates mut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments Case ought to be distinguished since in that case the court came to a conclusion that prima facie the intention was to transfer shares and not to pledge them, and that there was an express power to trade, sell, assign or transfer the rights / obligations of the stock during the continuance of the agreement. Mr. Chinoy submitted that in our case, there was a clear pledge and the relevant clause merely permitted the pawnee to use the shares pawned as collateral for his own margin purpose . Now, as recognized by the trade, a margin may be kept by a client desiring to deal in securities options with the depository participant in the form of cash or shares deposited as collateral in leau of such cash. In the event of the client being unable to square off an overdue position, the depository participant can appropriate the cash or deal with the shares kept as collateral, as the case may be. The Depository Participant - Client Agreement authorizes the depository participant to do so. Transfer of shares to a third party with authority to use the shares as collateral for his own margin purpose would, thus, imply nothing but the authority to permit the depository participant to trade, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Plaintiff's claim to the right rather than knowledge of the right itself, much less its acknowledgment. Learned Counsel for Defendant No. 3, on the other hand, explains this conduct thus: By a circular dated 21 October 2013, National Stock Exchange (NSE) revised the list of approved securities when the shares of Flexituff International Ltd. were removed from the approved list of securities acceptable towards margin requirements with effect from 1 November 2013; without these shares being reckoned towards the margin requirement, the account of Defendant Nos. 1 and 2 would have shown a huge naked debit, which Defendant No. 3 would in any event have been forced to pay to NSE; Even if the open F O position of Defendant Nos. 1 and 2 was squared off, they would still have been liable to pay more than ₹ 6 crores to Defendant No. 3; Defendant No. 3 had given notice to Defendant Nos. 1 and 2 in that behalf; since the position was neither squared off nor secured by an adequate alternative margin, Defendant No. 3 had to sell and transfer the Flexituff shares held as collateral before 1 November 2013 and therefore, did so on 29 October and 30 October 2013. Mr. Chinoy, on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X
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