The Supreme Court will continue hearing on March 29, a petition filed by the State of Maharashtra, 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 will continue hearing the matter for final disposal on Tuesday i.e. 29th March 2022.
Jayant Mehta, Sr Adv appearing on behalf of NSEL referred to the impugned judgement and submitted that the exchange was not just about functioning for commodity trading but there are also more things which are connected. The main argument of NSEL is 63 Moons Technologies Ltd is not covered under the provisions of Maharashtra Protection of Interests of Depositors in Financial Establishments Act, 1999 (for short MPID Act).
He submitted 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 contract to buy a commodity with T+2 delivery cycle and simultaneously buyer/investor would also enter into a contract to sell the commodity with T+25 delivery cycle with the same parties as the first contract.
On the other hand, ASG Vikramjit Banerjee submitted that the only two things which is crux of the issue is High Court had held that for the purpose of this there is no deposit so it is not a financial establishment. There is also one aspect where the Bombay High Court had said it will not answer it and it leave it open to decide it in subsequent amount of time.
Justice DY Chandrachud, said, Mr. Banerjee you please assist us just give up the ingredients of Deposit under Section 2 (c) and then show us how according to you these ingredients are fulfilled. Just step by step.
ASG then referred to the brochure of NSEL which said that they are treating it as investment and my submission is it is social welfare legislation. So, this has to be interpreted. He, then, reads to the definition of Financial Establishment. So, it is not only about investment, I would say, the act was specifically because there was a thought that there would be people like this. Its been extremely widely defined. About the second part, I would agree with Adv Jayant Mehra that act is a scheme in itself and Sections 4, 7, 10,11 they are part of a scheme and they do have alternative remedy which they have chosen not exercise they could have but they have not. I am not going to addressing that.
ASG focused on the NSEL Brochure. It says investment opportunities, target segment, high network individual, retail investors, investors can invest and lock the money, offers unique investment etc. This is the reason the act was enacted for.
Justice Chandrachud – this is actually what learned counsel referred yesterday that the contents are same only the title is different as it says ‘investment opportunities’.
ASG submitted, My entire argument is they did accept the deposit; they are saying that they are just a platform. They are not just a platform; they did receive the deposit and assured returns so the entire conception of them is based on the High Court order which says they are not to blame because they are just a platform.
Justice Chandrachud – you are saying that NSEL accepts commodities from the seller and it issues a warehouse receipt to the seller and then accepts money from the buyer and the buyer is assured that after T+25 you will get more.
ASG said that the NSEL is actively involved in the financial transaction.
On 24.09,2019, While issuing notice in the matter, the bench of former Supreme Court judge, Justice RF Nariman and Justice Surya Kant had recorded the statement of Senior Advocate Mukul Rohtagi appearing on behalf of “63 Moons Technologies Ltd” who stated that nothing will be done to disturb the status quo existing as of 3rd September 2019.
Bombay High Court
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.”
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 returnsto 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 5600crore 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.
Counsel appearing on behalf of the 63moon broadly discussed the following points-
– NSEL is not a ‘Financial Establishment’ but an electronic platform to conduct trade in commodities in forward contracts where amounts paid-in and paid-out including margins represent the price of the goods bought and sold.
– 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.
– 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
It is submitted that NSEL is not a financial establishment and NSEL has acted only as a pass through or a platform and could not be termed as Financial Establishment. There is no deposit accepted by NSEL not it had promised any secured return but NSEL only facilitated the parties to enter into transactions and settlement of their accounts and remuneration payable to the NSDL by the buyers and sellers was a fixed fee based on turnover of transactions. The trade cycle is identical to a trade cycle of Indian Stock Exchange.
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.
Case Name- State of Maharashtra Vs 63 Moons