The Supreme Court has ruled in favour of Professional Clearing Members (PCMs) in a dispute arising from the liquidation of securities belonging to clients of defaulting stockbrokers. The Court held that, under the regulatory framework applicable at the relevant time, PCMs had no statutory obligation to verify the debit or credit position of individual clients of a Trading Member before liquidating collateral.
A Bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran also held that the National Stock Exchange Clearing Corporation (NCL) and its committee lacked statutory power to order restitution of the liquidated securities in the manner directed in the present cases.
Background Of The Case
The lead matter concerned Edelweiss Custodial Services Limited, a Professional Clearing Member, and securities placed with it by Anugrah Stock & Broking Private Limited, the defaulting Trading Member.
The dispute arose after securities worth about Rs.460.32 crore were liquidated to meet the Trading Member’s outstanding obligations. The MCSGF Committee of NCL later directed restitution of securities belonging to clients who allegedly did not have corresponding debit balances. Similar directions were passed in the connected appeals.
The PCMs argued that they had no direct contractual relationship with the individual clients of the Trading Members and that the regulatory system then in force did not provide them real-time access to individual client debit and credit positions.
Supreme Court’s Observations
The Court examined the regulatory framework, including the NCL regulations, SEBI circulars and the CM-TM agreement. It noted that the reporting system evolved over time from monthly reporting in 2016, to weekly reporting in 2019 and eventually daily reporting in 2021.
Importantly, the Court found that the daily reporting mechanism giving clear visibility of individual client collateral was not available when the securities involved in these appeals were liquidated.
The Court observed:
“The first question of law framed as to the existence of a statutory obligation on the PCM to verify the debit/credit positions of the constituents of the TM, before the collaterals proffered by the TM are liquidated, in the negative and in favour of the PCMs.”
The Court further held that the NCL or its committee did not possess the statutory power to impose restitution in the form ordered. Section 9(3)(b) of the Securities Act permitted penalties such as fine, suspension or expulsion, but did not authorise a monetary penalty of this nature.
Decision
The Supreme Court answered all three substantial questions of law against the NCL and the investors. It held that the PCMs had neither the statutory obligation to verify individual clients’ debit-credit positions nor the necessary visibility to do so under the regulatory system then existing.
The Court also rejected claims against the PCMs arising from the defaults of the Trading Members in the circumstances considered.
Consequently, Civil Appeal Nos. 31 of 2024, 2187 of 2024, 3179 of 2024 and 7313 of 2024 were allowed, and the orders passed by the MCSGF Committee and the Securities Appellate Tribunal were set aside.
Civil Appeal No. 4238 of 2026 was rejected as not maintainable, as the orders challenged in that appeal had already been set aside by the Supreme Court.
Pending applications, if any, were also disposed of.
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