Monday, December 4, 2023

NSEL is not a Financial Establishment: Supreme Court

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The Supreme Court partly heard the submissions made by NSEL, represented by Senior Advocate Mukul Rohatgi in a batch of petitions filed by the State of Maharashtra and NSEL Investors Action Group challenging the order passed by the Bombay High Court, observing that the National Spot Exchange Limited was not a Financial Establishment within the purview of the Maharashtra Protection of Interest of Depositors in Financial Establishment Act, 1999. 

The bench comprising of Justice DY Chandrachud, Justice Surya Kant and Justice Bela M Trivedi continued hearing the matter for final disposal on Tuesday.

The bench comprising of J. Smt. Bharati H Dangre and J Ranjit More, Bombay High Court held that National Spot Exchange Limited (NSEL) was not a ‘financial establishment’ since it did not accept any deposits, as defined under the Maharashtra Protection of Interests of Depositors in Financial Establishments Act, 1999 (MPID Act).

The court held that NSEL was a commodities exchange where commodities were traded between willing buyers and sellers acting through their brokers. The High Court had also observed that, “the EOW finding the entire money trail to the defaulters, the State attached properties of 63 Moons, which was not legally sustainable.”

Sr. Adv Rohatgi represents investors of NSEL, the wholly subsidiary of 63 Moons Technologies Ltd.


Sr.Adv Rohatgi – I will only talk on admitted facts and not on disputed facts. I am promoter and NSEL is defunct that was running commodity exchange. It is an exchange where people buy commodities for e.g. -from mandi my lord like purchasing of dal, chawal etc.

Sr. Counsel Rohatgi explained the nature of business of its company by stating that – ‘A commodity exchange is a platform. I am an exchange and I am neither seller nor a buyer. In commodity exchange, it has brokers just like stock exchange. Brokers are accredited just like stock exchanges. Brokers represents sellers and buyers. There may be no. of warehouses. 

‘The money actual passes from buyer through broker through my exchange to seller, I don’t retain any money, made further submission by NSEL.

Our act (MPID Act) is diff from Tamilnadu act, states NSEL counsel.

 I don’t issue bank FDR – nor I charge any interest submits Sr. Adv, Rohatgi for NSEL.

Further, Mr. Rohatgi argues – In my case, and its nobody case that I take deposit with promise of return. I only get commission from my business.

The Short point in this litigation whether I am covered by provision of MPID Act, contends Sr. counsel Rohatgi. 

To which J. Chandrachud submits the then former Chief justice of India Altamas Kabir reiterated the view about legislative competence of the act. 

Further Mr. Rohatgi says – I m not on legislative competence of the Act. there are traders who engages brokers on both sides. 

My lord, I will explain concept of ‘Pairing’ argues Sr. Counsel Rohatgi.

Rohatgi further make his point on the facts before the 3 judges Bench that there are 2 transactions which is a sham transaction. In fact, there are transactions of goods in actual, which is a camouflage. 

Justice Bela submits – As far as my understanding is concerned, it is not necessary that transaction should be between same parties. 

J.Chandrachud cites an instance on day zero, A sells 1000 kg pulses to B. The transaction is between B AND C. 

Rohatgi – My lord, it has to be B AND A. 

On the paper, there is no loan transaction ,further submissions in continuation of arguments Rohatgi.

My employees turned blind eye on the transactions,  my accounts were attached, submits Rohatgi.

J. Bela to Sr. Counsel Rohatgi – So you have not challenged vires of act ?

Rohatgi further argues that Order 37 cannot be applied summarily. 

Pursuant to report, Bombay High Court passed various decrees against those fellows and not against ME (NACL). 

Rohatgi- Some guarantees are also taken from brokers also.

Rohatgi reads out the appeal filed by Maharashtra Govt. Further he mentions of the allegations levelled by the complainant Pankaj  Ramnaresh Sharaf, wherein upon his complaint an FIR got registered under Section120B read with Sections 409, 465, 467, 471, 474 and 477(A) of the IPC.  

Complainant alleges of default of 5600 crore as if it was his money, argues before 3 Judges Bench of apex court.

J. DY Chandrachud interjected in between, submits to NSEL – ‘But you were participant In criminis.’

Meanwhile, Rohatgi reads out certain paragraphs from the impugned judgment of Bombay High Court 

J. Chandrachud –  ‘You had to put some restrictions.’

Rohtagi – All brokers are accused, not even me is involved

Rohtagi- I am accused in the case as they are also. I cannot be prosecuted under the charges levelled against me 

Rohatgi stressed upon the main issue that whether the accounts remain attach for indefinite period ? 

Just because I am a financial establishment who receives deposit , the accounts/properties merely cannot be attached on this ground – Rohtagi.  No criminal liability made out ,submits Sr. Counsel Rohatgi.

No EOW is against me. Says Rohatgi.

I attacked provisions of the act and so the notifications – Rohatgi.

It’s a civil death for 63 moons – Rohatgi.

63 moons produces software’s – all my software’s  attached – argues Mr.Rohatgi.

What can come against me is the judgment delivered by former Justice Katju. 

Rohatgi referred to the judgment of  Bhaskaran and submitted that   this case  cannot and should not be treated as precedent.

In Bhaskar case also, It is  a simple case of deposit of money submits Rohatgi.

That nothing to do with commodity exchange ,submits Mr. Rohatgi while taking reference of BHASKARAN CASE

In Bhaskaran case , this court made constitutional slip 

Tamilnadu case was only on legislative competence but observations were not on Bombay Act, states Mr. Rohatgi.

The writ petitions were filed by 63 moons company who is 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 Company claims to be a leader in Financial Technologies market and has developed a software by name “ODIN” and it is claimed that this software has provided a platform for online trading and that it has become a market leader due to its effort and determination.

The petition was filed challenging the Constitutional validity of Sections 4 and 5 of the Maharashtra Protection of Interest of Depositors in Financial Establishments Act, 1999  being violative of Article 14, 19 and Article 300A of the Constitution and also to levy of attachment of assets of the company by 6 notifications issued by the state by invoking the powers conferred on the authority under the said enactment.

It is submitted that one of the subsidiaries of the 63 moon, National Spot Exchange Ltd. (NSEL) and 63moon hold 99% shares of NSEL. 

The NSEL had launched contracts for buying and selling of commodities on its trading platform with different settlement periods ranging from T+0 days to T+36 days. The word ‘T’ denotes the Trade date i.e. the day on which the trade took place and ‘+0’ or ‘+36’ is referred to as number of business days after which the delivery of commodity and payment of price therefor, was to be affected by the Buying Trading Member and Selling Trading Member.

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 depositors but there was a failure to return the deposits when the time for repayment came.

In 2014, a FIR came to be registered under Section 120B read with Sections 409, 465, 467, 471, 474 and 477(A) of the IPC wherein it was alleged that by unilaterally closing down the Exchange, the NSEL defaulted in repayment of approximately Rs 5600 crore which was due to be paid to approx. 13,000 investors. Since NSEL did not have sufficient money or property to return the deposits or make payment of interest or render services against which the deposits were received in terms of Section 4 of MPID Act, 1999, thus, the petitioners were held liable to attach the properties. Economic Offences Wing of Mumbai Police (EOW) who was subsequently investigating, had filed three charge sheets but not a single rupee has been traced by money trail to the petitioner as a promoter not the petitioner was named as an accused.

High Court relying on Carona Limited Vs. M/s. Parvathy Swaminathan and Sons had concluded that the NSEL is not a Financial Establishment and resultantly, the petitioner who is a promoter of the said establishment cannot be proceeded under the provisions of MPID Act. Resultantly, we are constrained to quash and set aside the action to which the petitioner is subjected to by taking recourse to the provisions of MPID Act.

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