BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 148 of 2010
And
Misc. Applications No. 98 and 113 of 2010
Date of decision: 28.6.2011
M/s Emmel Financial Services
Nanabhay Mansion, 3rd Floor,
Office No.1, Sir P. M. Road,
Mumbai – 400 001.
……Appellant
Versus
1) Bombay Stock Exchange Limited
Floor 25, P J. Towers,
Dalal Street, Mumbai – 400 001.
2) Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
3) Nikko Stock Brokers Pvt. Ltd.
R-410, Rotunda Building,
Mumbai Samachar Marg,
Mumbai – 400 001.
…… Respondents
Mr. Shailesh Shah, Advocate with Mr. Sim il Purohit and Mr. Nikhil Mengde,
Advocates for the Appellant.
Mr. Janak Dwarkadas, Senior Advocate with Mr. Pesi Mody,
Mr. Rahul Dwarkadas and Mr. Faraz Sagar, Advocates for Respondent No. 1.
Mr. Shiraz Rustomjee, Advocate for Respondent No. 2.
Mr. M. G. Agre, Advocate for Respondent No. 3.
CORAM : Justice N. K. Sodhi, Presiding Officer
S. S. N. Moorthy, Member
Per : Justice N. K. Sodhi, Presiding Officer
The Securities and Exchange Board of India (for short the Board) is a
statutory body established under Section 3 of the Securities and Exchange Board
of India Act, 1992 (for short the Act) with a view to promote the development of
and to regulate the securities market and to protect the interests of investors in
securities. It regulates the market intermediaries including stock exchanges and all
2
other market players. Section 11 of the Act enjoins a duty on the Board to protect
the interests of investors in securities by such measures as it thinks fit. With a
view to carry out the objects for which the Board has been set up, it has framed a
plethora of regulations a nd, in addition, it issues ci rculars and guidelines from
time to time as may be necessary for re gulating the securities market and to
protect the interests of investors. Quite often disputes arise between brokers
inter se and between brokers and their clie nts and for settlement of such disputes,
the rules, regulations and bye-law s of Bombay Stock Exchange Ltd.
(for short BSE) and other stock excha nges provide for compulsory arbitration.
Sometime in the year 1999, it came to the notice of the Board that arbitration
awards passed in favour of the clients /investors were not being implemented by
the stock brokers and the stock exchanges were unable to take prompt action to
ensure the implementation of the awards. The stock exchanges felt that since the
Arbitration and Conciliation Act, 1996 pr ovided three months time to the person
feeling aggrieved by the aw ard to make an application to the Court for setting
aside the same, they could not take prompt action in getting them enforced. The
matter as to how prompt action could be taken by the stock exchanges was
discussed by the Board and the following two decisions were taken:
- “The Stock Exchange should on recei pt of the arbitration award,
debit the amount of the arbitration award from the security deposit
or any other monies of the member (against whom an award has
been passed) and keep the amount in a separate account.
Thereafter, a confirmation may be obtained from the concerned
member that he has not filed any appeal within the stipulated time
under section 34 of the Arbitration and Conciliation Act and only
then the payment may be made to the awardee. If an appeal is
filed and the same is pending in a Court of law, the amount so kept
in the separate account be paid to the awardee in accordance with
the court orders. - At the time of debiting the amount, the Stock Exchange may if so
desire inform him that the Exchange will not be liable for loss of
interest, business etc., in case the award is modified by the Court.
The Exchange may also indicate th at if any amount of interest is
still payable to the awardee e.g. from the date of debiting the
member’s account till the date of payment of the award amount to
the awardee, the same be recoverable from the concerned member
and the Stock exchange shall not be liable in this regard.”
Accordingly, a circular dated July 9, 1999 was issued communicating to all the
stock exchanges the aforesaid decisions and they were advised to comply with the 3
same immediately. For better implementati on of the directions contained in this
circular, the Board issued another circ ular on March 27, 2002 directing all the
stock exchanges to incorporate the above decisions in their bye-laws, rules and
regulations. Some of the brokers felt ag grieved by the circular of July 9, 1999
and they challenged the same in the Bombay High Court in Writ Petition
No. 168 of 2002 which was dismissed by a Division Benc h of the High Court on
January 23, 2002. While upholding the validity of the circular, this is what the
learned Judges said:
“In our opinion the challenge to the impugned circular is without
any substance. The circular has been issued by the SEBI Board in
exercise of powers under section 11 and 11B of the SEBI Act in
order to protect interest of the investors. It has been brought to the
notice of the SEBI Board that arbitration awards passed in favor of
the clients/investors are not implemented and the Stock Exchanges
are unable to take appropriate action in order to ensure
implementation of the awards. In our opinion the decision taken
by the SEBI is in the right dire ction. It helps to protect the
investors. The circular issued by the SEBI is confined to
members/brokers of the Stock Exchanges and there is no question
of the circular being contrary to the provisions of section 36 or any
other provisions of the Arbitration and Conciliation Act, 1996. We
do not find any illegality or arbitrariness in the circular.”
- The appellant before us is a public limited company and it had been
trading in the securities market, among others, on BSE through Nikko Stock
Brokers Pvt. Ltd. which is respondent no. 3 in this appeal. This respondent was a
member of BSE and shall be referred to he reinafter as the broker. Pursuant to the
trades executed by the broker on behalf of the appellant, the latter claimed that a
sum of Rs.3,14,10,285.20 was due to it from the broker. Upon failure of the
broker to pay this amount, the appellant initiated arbitration proceedings before
the Arbitral Tribunal of BSE in accord ance with its rules, bye-laws and
regulations. The Arbitral Tribunal gave its award dated December 31, 2001
holding that the broker was liable to pay to the appellant a sum of
Rs.2,60,40,342.49. The appellant communicated this award to BSE under cover of
its letter dated January 8, 2002. A copy of the award and this letter are on record.
It is pertinent to mention that the appellant in his letter of January 8, 2002 had
requested BSE to pay to it the awarded amount from the monies, security deposits 4
and all types of margins and bank gua rantees of the broke r lying with the
Exchange. This letter was received by BSE on January 8, 2002. In terms of the
aforesaid circular, BSE was required to debit the account of the broker and keep
that amount in a separate account and pay the same to the appellant after verifying
from the broker that it had not filed any application for the setting aside of the
award. It is pertinent to mention that on receipt of a copy of the award, BSE
invoked the bank guarantees amounting to Rs.2.5 crores which had been
furnished to it by the broker and recovere d the funds thereunder. The governing
board of BSE then met on January 16, 2002 an d, inter alia, considered the assets
and liabilities of the broker as on that date. The repres entatives of the appellant
and the broker and one Jugal Saraf who also claimed to be a creditor of the broker
were present and were heard by the governing board. The appellant made an
application dated January 16, 2002 requesting BSE to make payment of
Rs.2.21 crores to the income tax authori ties on its behalf from the funds of the
broker that were due to it. The broker also agreed before the governing board that
an amount of Rs.2.21 crores be paid to the income-tax authorities on behalf of the
appellant and the same be treated as payment by it to the appellant. The broker
further agreed that a sum of Rs.5 lacs be released to Jugal Saraf in full and final
settlement of his claim. After hearing the appellant and the broker, the governing
board took the following decisions on January 16, 2002:
“(a) Rs.2.21 crs. be paid to the Income Tax Authorities
on behalf of Emmel Financ ial Services, who were
creditors of Nikko Stock Brokers Pvt. Ltd. This
amount should be treated as payment by Nikko
Stock Brokers Pvt. Ltd. to Emmel Financial
Services towards its claim against the member.
However, Nikko Stock Brokers Pvt. Ltd. should
obtain no objection letters from other claimants on
record of the Exchange as of today and submit the
same to the Exchange.
(b) ………………………………………………………
(c) Rs.5.00 lakhs should be paid to Shri Jugal Saraf in
full and final settlement of his claim of interest
against the member. Shri Jugal Saraf agreed.”
It is BSE’s case that since the broker did not obtain no objection letters from other
claimants, it (BSE) sent a letter to the broker on January 21, 2002 calling upon it 5
to do the needful and that th e broker did not comply with the directions. In the
meantime, BSE received for the first tim e on February 6, 2002 two complaints –
one from Shree Harivansha Securities (P) Ltd. and the other from Mahendra
Kumar Saraogi, its director that am ounts exceeding Rs.3.56 crores and
Rs.30.71 lacs respectively were due to them from the broker. Both these
complaints are dated February 5, 2002. The matter was again taken up for
consideration by the governing board of BSE on February 8, 2002 when the
appellant and the broker were present. The broker was directed to submit a list of
its creditors to the Exchange within two days and the payment of Rs.2.21 crores to
the income tax authorities on behalf of the appellant was kept in abeyance. By
letter dated February 8, 2002, the broker fo rwarded to BSE a list of its 46 clients
to whom it had pending obligations in re spect of transactio ns on the Exchange
and admitted that it had a liability of over Rs.19.68 crores including the claim of
the appellant. This is what the broker said in its letter of February 8, 2002:
“As desired by the Governing Board we are enclosing
herewith a list of our clie nts and obligations pending
against them which are to be discharged as on 8 th February, - The total of such liabilities are Rs.19,68,73,493.54
and the same are arising out of transactions done on the
Exchange.”
It is pertinent to note that the broker admitted its liability towards its clients but it
did not admit its inability to pay. Be that as it may, BSE felt that since the
liabilities of the br oker were over Rs.24 crores and its assets with the Exchange
were only about Rs.3.11 crores, the governing board in its meeting held on
February 25, 2002, inter alia, rescinded its earlier decision to pay Rs.2.21 crores
to the income tax authorities on behalf of the appellant and declared the broker a
defaulter. This decision was taken in the absence of the appellant. However, a
sum of Rs.5 lacs was paid to Jugal Sa raf as decided in the meeting held on
January 16, 2002 even though he did not have an award in his favour. On the
same day BSE issued a public notice informing its members and the public that
the broker had been declared a defaulter. By letters dated March 4, 2002 and
April 17, 2002, BSE informed the appell ant about the broker being declared a
defaulter and advised it (appellant) to lodge its claim with the Defaulters’ 6
Committee. It is pertinent to mention that the effect of a broker being declared a
defaulter is that all its assets come to vest in the Defaulters’ Committee for the
benefit of and on account of the creditor members and all monies, securities and
other assets due, payable or deliverable to the defaulter have to be paid or
delivered to the Defaulters’ Committ ee for pro rata distribution among the
creditor members whose claims are admitted in accordance with the bye-laws and
regulations of BSE. This is provided in bye-laws 326, 327 and 330 of the
bye-laws framed by BSE. The order of priority in which the assets of the defaulter
are to be disbursed/applied is given in bye-law 400. - Since the amount due to the appellant was not being released by BSE, the
former served a notice dated April 30, 2002 through its counsel to pay the said
amount in terms of the circular dated July 9, 1999 issued by the Board. BSE sent
its reply through counsel stating that the broker had been declared a defaulter on
February 25, 2002 on account of its failure to settle the claims of its creditors and,
therefore, it would not be proper to utilize the funds of the broker to settle the
claim of the appellant as that would be unfair and inequitable and amount to
preferential payment. BSE further stat ed that the appellant could make an
application to the Defaulter’s Committee for the recovery of the amount due to it.
The appellant sent another notice to BSE as per letter dated August 2, 2002
calling upon the latter to make the payment in accordance with the circular issued
by the Board. A copy of this letter was endorsed to the Board as well. The
appellant had also made a complaint to th e Board in this regard. BSE was called
upon by the Board to explain why the award in favour of the appellant was not
being implemented. After exchange of some correspondence between the Board
and BSE, the former by its letter of September 18, 2002 advised th e latter as
under:
“Thus, the action of the Exchange in not implementing the award
in the manner provided by the directive of SEBI dated
July 09, 1999 amounts to it acting in violation of the said directive.
In view of the above, you are advised;
1) to immediately implement the arbitration award dated
December 31, 2001 passed in favour of M/s. Emmel Financial 7
Services against M/s. Nikko Stock Broker Pvt. Ltd. for a sum
of Rs.2,60,40,342.49 and confirm the compliance;
2) to explain, within 15 days, why the Exchange has failed to
implement the award in the manner provided by the SEBI
directive dated July 09, 1999.”
Despite the advice given by the Board, BSE was adamant in not implementing the
award and again by its letter of Novemb er 26, 2002 the Board advised BSE as
under:
“In view of the above and to protect the interests of the investors in
the securities market, you are ag ain advised to implement the
arbitration award dated December 31, 2001 passed in favour of
M/s. Emmel Financial Services against M/s. Nikko Stock Broker
Pvt. Ltd., for a sum of Rs.2,60,40,342.49 and confirm the
compliance. If you are of the view that the payment cannot be
made out of the assets of M/s. Nikko Stock Brokers Pvt. Ltd., you
may like to make the payment out of your own resources and
recover the amount from the assets of M/s. Nikko Stock Brokers.
You are also advised to immediately carry out suitable
amendments to your bye-laws so as to incorporate the directions
contained in our circular dated July 09, 1999 and thereafter.”
The Board in the two aforesaid letters ha d used the word ‘advi sed’ but it was in
fact a direction and BSE should have car ried out the same. Since it did not
implement the award, the appellant file d execution proceedings in the Bombay
High Court and initiated Garnishee proceedings against BSE. An amount equal to
the claim of the appellant was attached in the hands of BSE. A learned single
Judge of the Bombay High Court by hi s order dated March 12, 2003 allowed the
chamber summons of BSE and the earlier order of attachment was revoked. The
learned single Judge accepted the plea of BSE that since the broker had been
declared a defaulter, the a ppellant could only recover its monies in accordance
with bye-laws 326 and 400 of the bye-laws of BSE. It was further held that the
bye-laws had a statutory force. While re jecting the claim of the appellant, the
learned single Judge recorded his findings in the following words:
“In the present case, it is seen that the Award was passed
on 31 st December, 2001 and the statutory period for filing
appeal was available to the Re spondents, but before expiry
of that period, the Respondents came to be declared as
Defaulters on 25th February, 2002. Obviously, there was no
question of making any payment to the Applicants till this
date i.e. 25 th February, 2002 whereas, as soon as the 8
declaration that the Responde nts were defaulters was
issued, by virtue of Bye-Law 326, all the amounts standing
in the accounts of the Res pondents towards securities
deposited by him stood vested in the Defaulters Committee
and that amount could be disbursed only in terms of Bye-
Law No.400 and not otherwise.”
Feeling aggrieved by the order of the le arned single Judge, the appellant filed
Appeal no.530 of 2003 before the Division Bench which was partly allowed on
April 26, 2010. The Division Bench while holding that the attachment order
could not have been made as the amount in the hands of BSE was not a debt owed
by it to the broker, set aside all other findings of the learned single Judge and
made it clear that as and when the issue regarding enforceability of the circulars
issued by the Board is raised before any Court, the same shall be decided on its
own merit without being influenced by any observation made by the learned
single Judge. After the disposal of th e appeal by the Bombay High Court, the
appellant by its letter dated June 8, 2010 again called upon BSE to make the
payment of the awarded amount in term s of the circular dated July 9, 1999
pointing out that the Board had already a dvised it (BSE) to make the payment.
No reply was received from BSE and, therefore, another letter dated July 10, 2010
was written making the same request. BSE then replie d through its letter dated
August 10, 2010 sent through its advocates stating that the appellant was not
entitled to recover the amount as claime d. Feeling aggrieved by the action of
BSE in not implementing the award and the directions issued by the Board, the
appellant has filed this appeal challenging its inaction raising the issue of
enforceability of the circulars. - BSE has tried to justify its stand of withholding the awarded amount that
is due to the appellant from the broker. It has not disputed the aforesaid facts and
it will be useful to notice its stand in its own words. This is what BSE has stated
in its reply:
“2.7 By a letter dated 8.1.2002, the Appellant inter alia informed
the Exchange that an ar bitration award dated 31.12.2001
had been passed in its favour against Respondent No.3 for
an amount of about Rs.2.60 crores. It is pertinent to note 9
that the said Award expressly rejected the claims for
interest and costs.
2.8 Bank Guarantees amounting to about Rs.2.5 crores which
had been furnished to the Exchange by Respondent No.3
were expiring, and in view of the said unresolved claims
against the Respondent no.3, the Exchange invoked the
same and recovered the funds there under.
2.9 The Governing Board of the Exchange at a meeting held on
16th January 2002, inter alia considered the position of
assets and liabilities of Re spondent No.3 as were then
known to the Exchange, and heard the representatives of
the Appellant, Respondent N o.3 and the said Mr. Jugal
Saraf. The Governing Board, then decided that:
a) Out of the funds of Respondent No.3 lying with the
Exchange, an amount of Rs.2.21 crore be paid to the
Income Tax Authorities on behalf of the Appellant and
the same be treated as payment by Respondent No.3
towards the claims of the Appellant and the said
amount of Rs.5 lacs be releas ed to Mr. Jugal Saraf in
full and final settlement;
b) The aforesaid payment of Rs.2.21 crore to the Income
Tax Authorities on behalf of Respondent no.3 would be
subject, inter alia, to Respondent No.3 obtaining and
submitting to the Exchange, no objection letters from
other parties who had claims against Respondent No.3
as per the records of the Exchange.
2.10 By a letter dated 16.1.2002, the Appellant inter alia
expressly recorded its consent / no objection to the release
of the said payments of Rs.2.21 crore to the Income Tax
Authorities and the said amount of Rs.5 lacs to Mr. Jugal
Saraf. Consequently, the said Rs.5 lac was thereafter
released to the said Mr. Jugal Saraf. Annexed hereto and
marked Exhibit ”B” is a copy of the said letter dated
16.1.2002.
2.11 The Exchange addressed a letter dated 21 st January 2002 to
Respondent No.3, calling upon it to ensure compliance with
the above directions of the G overning Board and to submit
an affidavit cum indemnity; however Respondent No.3
neither complied with the said directions of the Governing
Board nor submitted the required indemnity to the
Exchange.
2.12 The Exchange then received fresh claims and complaints
against Respondent No.3, including a claim for over
Rs.3.56 crores from one Hariva nsha Securities Pvt. Ltd.
and a claim for over Rs.30.7 lacs from one Mahendra
Kumar Saraogi. The said matte r was therefore once again
considered by the Governing Board on 8 th February 2002,
and after hearing inter alia representatives of the Appellant
and Respondent No.3, it was inter alia decided to direct
Respondent No.3 to submit a list of its creditors to the
Exchange within 2 days, and to keep the said payment of
Rs.2.21 crore to the Income Tax Authorities on behalf of
the Appellant in abeyance.
10
2.13 Respondent No.3, vide its letter dated 8 th February 2002
forwarded to the Exchange, a list of its clients to whom it
had pending obligations in re spect of transactions on the
Exchange. To the shock and surprise of the Exchange, the
said letter revealed for the fi rst time that Respondent No.3
had outstanding Exchange liabili ties to 46 parties totally
amounting to over Rs.19.68 crores including the claim of
the Appellant. Annexed hereto and marked Exhibit “C” is a
copy of the said letter dated 8.2.2002.
2.14 In view of the said s hocking revelation by Respondent
No.3, and since the said liabiliti es thus belatedly disclosed
by Respondent No.3 far exceeded its assets as available
with the Exchange; i.e. while the said disclosed liabilities
were over Rs.24.05 crores, and the then available Exchange
assets were only Rs.3.11 cror es (approx); the Governing
Board at a meeting held on 25.2.2002 inter alia rescinded
its earlier decision to pay Rs.2.21 crore to the Income Tax
Authorities on behalf of the Appellant and declared
Respondent No.3 as a defaulter. Consequently, in
accordance with the Rules, Bye-Laws and Regulations of
the Exchange, all the assets, monies, securities, deposits
etc. of Respondent No.3 lying with the Exchange,
immediately stood vested in the Defaulters Committee of
the Exchange for equitable distribution among the
Exchange creditors of Respondent No.3 in accordance with
the said Rules, Bye-laws and Regulations. The said
declaration of Respondent No.3 as a defaulter was inter alia
duly notified by the Exchange’s public notice dated 25 th
February, 2002, a copy whereo f is annexed hereto and
marked Exhibit D.”
It is clear from the reply of BSE that as on February 8, 2002, it did not have on its
record the name of any creditor other th an the appellant and Jugal Saraf to whom
monies were due from the broker. It was only on February 6, 2002 that BSE
received for the first time two complaints – one from Shree Harivansha Securities
(P) Ltd. and the other from Mahendr a Kumar Saraogi alleging that amounts
exceeding Rs.3.56 crores and Rs.30.71 lacs re spectively were due to them from
the broker. Both these complaints are dated February 5, 2002. Copies of these
complaints were produced by BSE on our asking. On February 8, 2002, the
broker furnished to BSE a list of its c lients to whom it had pending obligations
and BSE claims that it was shocked and surp rised to notice that the broker had as
on that date outstanding liabilities of over Rs.19.68 crores.
- We have heard the learned counsel for the appellant and Shri Janak
Dwarkadas, learned senior counsel on behalf of BSE and also the learned counsel 11
for the other two respondents. It is cont ended on behalf of the appellant that the
award in favour of the appellant was pr ior to the date on which the broker was
declared a defaulter and, therefore, BSE is not justified in asking the appellant to
approach the Defaulters’ Committee for getting the award executed. He has
referred to the two circulars issued by th e Board regarding the implementation of
awards obtained by investors against the member brokers and contends that BSE
should have debited the awarded amount from the monies of the broker lying with
it and the same should have been paid to the appellant when the broker had
confirmed that no application was being f iled for the setting aside of the award.
In other words, the argument of the lear ned counsel for the appellant is that BSE
should be directed to implement the ci rcular dated July 9, 1999 issued by the
Board. The learned senior counsel appearing on behalf of BSE very strenuously
argued that the broker ha d been declared a defau lter on February 25, 2002 by
which date the time prescribed for filing an application for setting aside the award
had not expired and, therefore, BSE could not make payment to the appellant and
with effect from February 25, 2002 all its monies lying with BSE vested in the
Defaulters’ Committee and the appellant could get the awar d executed only by
approaching that committee. He contends that even if th e awarded amount had
been kept in a separate account as requi red by the circular, the same too would
have vested in the Defaulters’ Committ ee because the title to the money kept
apart would still remain with the broker. It is also urged on behalf of BSE that the
circular requires a stock exchange to make payment to the award-holder only on
receipt of confirmation from the member th at he was not filing an application for
the setting aside of the award and since there was no such confirmation from the
broker, BSE was justified in not making the payment. It was argued that since the
period of 90 days prescribed for filing an application for setting aside the award
had not expired when the broker was declar ed a defaulter, th e circular did not
apply. The learned senior c ounsel also contended that, in any case, the circular
would not apply once a member is declared a defaulter. It was also argued that the
circular is illegal and violat ive of Article 14 of the Cons titution in as much as it 12
differentiates between creditors inter se. The argument is that the circular
differentiates between the award-holder s on the one hand and decree-holders on
the other and provides a prompt remedy for the implementation of only the
awards and not the decrees when both th e award-holders and the decree-holders
are creditors whose claims are substantiated and who are similarly situated. - Having given our thoughtful considerat ion to the rival c ontentions of the
parties, we find merit in what is urged on behalf of the appellant. Bye-law 248 of
the bye-laws framed by BSE pr ovides that “All claims ( whether admitted or
not) difference and disputes between a member and non-member or non-
members…. arising out of or in relation to dealings, transactions and contracts
made subject to the Rules, Bye-laws a nd Regulations of the Exchange or with
reference to anything incidental th ereto……………… shall be referred to and
decided by arbitration as provided in the Rules, Bye-la ws and Regulations of the
Exchange.” When disputes arose betw een the appellant which is a non-member
and the broker, a member, the same was referred to arbitration and the former
obtained an award in its favour on December 31, 2001. Admittedly, this award
was communicated to BSE on January 8, 2002 and till February 6, 2002 it did not
know whether the broker had any other liability except that of Jugal Saraf and the
appellant. It is BSE’s own case that it was shocked and surprised when it learnt
on February 8, 2002 that the broker had an outstanding liabili ty of more than
Rs.19.68 crores towards its clients. This being so, when the governing board met
on January 16, 2002 and considered the award, it should have immediately
debited the amount of the ar bitration award from the m onies of the broker lying
with it particularly when it had no other cr editor before it. Even if there were
other creditors before BSE, none of th em had an award in its favour including
Jugal Saraf. It is not in dispute that BS E had more than Rs.3 crores with it in the
account of the broker by way of security deposits and other monies received on
revocation of bank guarantees. All that the circular of July 9, 1999 requires is that
before debiting the amount, BSE should have verified from the broker whether it
was moving an application in Court for the setting aside of the award. The broker 13
and the appellant were both present before the governing board on
January 16, 2002 and, as already noticed, the broker had stated that a sum of
Rs.2.21 crores be paid to the income tax authorities on behalf of the appellant and
the same be treated as payment made by it to the appellant. This statement of the
broker was enough confirmation of the fact that it was not challenging the award
in Court. If the broker wanted to challenge the award, it would not have told BSE
to make payment to the appellant. Moreover, there is no prescribed form in which
the confirmation is to be obtained. It is true that by then the period for filing an
application for setting aside the award had not expired but since the broker had
made its intention clear that it was not challenging the same, BSE should have
immediately debited the account of th e broker and paid the amount to the
appellant. By that time the broker had not been declared a defaulter and its monies
were lying with BSE. It had no business to wait till February 25, 2002 when the
broker was declared a defaulter. The whol e purpose of the circular is to ensure
prompt implementation of arbitration aw ards and the Board did not want the
exchanges to wait even for the expiry of 90 days which is the period prescribed
for filing an application for the setting aside of an award. By not debiting the
amount on January 16, 2002, BSE frustrat ed the very object underlying the
circular and we have no doubt that it acted in violation thereof. Moreover, on a
complaint filed by the appellant the Board had made it clear to BSE that the latter
had violated the circular and that it should “ immediately implement the
arbitration award ………..” We wonder why BSE did not carry out the
directions of the Board which it ought to have and we cannot appreciate its
adamant attitude in this regard. It should have given a more thoughtful
consideration to the matter particularly wh en it had received directions from the
Board. It must be remembered that BSE is only one of the intermediaries of the
securities market and its rules, regula tions and bye-laws govern only it and its
members. The Board, on the other hand, regulates the whole of the securities
market including all the intermediaries and other market players. Therefore, in
the very nature of things, the regulations , circulars and/or bye-laws issued by the 14
Board would override all rules, regulati ons and bye-laws of BSE. We do not
think that this proposition could be disputed. By circular dated March 27, 2002
all the stock exchanges had been directed to amend their rules, regulations and
bye-laws to bring them in conformity w ith the circular of July 9, 1999. BSE has
been remiss in carrying out this direct ion as well. Its plea that there was no
question of making any payment to the appellant till February 25, 2002 as the
statutory period for filing an application for setting aside th e award had not yet
expired and thereafter all the assets of the broker vested in the Defaulters’
Committee is not only without merit but also lacks bona fides. BSE is losing
sight of the fact that the representativ e of the broker was present before it on
January 16, 2002 and had made his intenti on clear that the award was not being
challenged. Where is then the question of waiting for the statutory period for
filing an application to e xpire? If the governing boa rd had any doubt it should
have asked the broker whether he was challenging the award. We have no reason
to believe that such a question would not have been asked particularly when BSE
had the circular before it though we do not find anything on our record in this
regard. All awards obtained prior to th e date on which a br oker is declared a
defaulter have to be implemented promptly in terms of the circular and it is only
those awards which are obtai ned subsequent to the date of the declaration that
have to go to the Defaulters’ Committee. In this view of the matter, BSE cannot
ask the appellant to go to the Defaulters’ Committee and stand in queue with other
creditors and recover the amount on pro rata basis. - Another plea that BSE has taken for not implementing the award is that
any payment made to the appellant would have amounted to a fraudulent
preference which was neither fa ir nor equitable. In our view this plea is equally
baseless. The award had been obtained much prior to the date on which the broker
had been declared a defaulter and there wa s no other creditor of the broker as on
that date except Jugal Saraf who did not have an award in his favour. In these
circumstances, we wonder how payment ma de to the appellant in terms of the
circular would have amounted to fraudulen t preference. As a matter of fact, the 15
payment made to Jugal Saraf in terms of the decision taken by the governing
board on January 16, 2002 could not be ju stified because he did not have an
award in his favour. As is clear from th e bye-laws of BSE, even admitted claims
are implemented only after the creditors obta in an award and it is for this reason
BSE had mentioned in the public noti ce dated February 25, 2002 by which the
public had been informed that the br oker was declared a defaulter that “ Those
members/investors who have any ou tstanding claims against the
defaulter……….are required to immediatel y obtain arbitration awards in
their favour and then put up their claims supported by arbitration awards to
the Defaulters’ Committee for its consideration .” In the result, we cannot but
hold that BSE violated not only the circul ar but also the subs equent directions
issued to it by the Board and its action in not debiting the account of the broker
and making payment to the appellant cannot be sustained. - It was argued by the learned senior counsel for BSE that even if the
awarded amount had been debited to the account of the broker and kept apart, the
title to the same would remain with th e broker and it would have vested in the
Defaulters’ Committee when the broker was declared a defaulter. There is no
question of the amount vesting in the Defaulters’ Committee because the amount
should have been debited on January 16, 2002 by which time the broker had not
been declared a defaulter and the same should have been paid to the appellant
before February 25, 2002. The grievance of the appellant that BSE should have
debited the amount and made payment to it on January 16, 2002 is justified. If this
had happened and BSE had complied with the circular which it ought to have, the
dispute would not have aris en. BSE should not be allowed to take advantage of
the delay for which it is responsible. We cannot also agree with the learned senior
counsel for BSE that the circular would not apply to the case in hand merely
because the period of 90 days prescribed for filing an application for the setting
aside of the award had not expired on the date when the broker was declared a
defaulter. 16 - This brings us to the last contenti on urged on behalf of BSE. It is
contended that the circular differentiates between creditors inter se and treats the
award-holders differently from the decree -holders both of whom are creditors of
the broker. It is urged that the award-hol ders have been provided with a prompt
remedy for the implementation of their awards whereas such a treatment has been
denied to the decree-holders and, therefore, the circular violates Article 14 of the
Constitution. There is no merit in this contention either. Let us be clear that
every award-holder is an investor in the securities market whereas a decree-holder
is not and section 11 of the Act enjoins a duty on the Board to take such measures
as it thinks necessary to protect the intere sts of investors. The circular has been
issued to protect the interests of invest ors and the Board is not concerned with
those who have obtained decrees from a civ il Court. The decree-holders are free
to get their decrees executed in accordance with law. The Division Bench of the
High Court while upholding the validity of the circular had pointed out that “ In
our opinion the decision taken by the SEBI is in the right direction .” Since
the award-holders and the decree-holders ar e not similarly situated, they have to
be treated differently and we find no fault with the circular in this regard. - No other point was raised.
- This brings us to the two applications filed by the creditors who claim that
large sums of money are due to them from the broker. They want to be impleaded
as respondents in the appeal and the primar y prayer that they have made in the
applications is for a direction to BSE not to disburse the awarded amount to the
appellant till the validity and genuineness of the award in its favour is verified and
scrutinized. The names of the two app licants figure in the list of creditors
submitted by the broker to BSE on February 8, 2002. The name of the third
applicant does not find mention therein. Be that as it may, even if the amounts
due to the applicants are admitted by the broker, they cannot be paid anything till
they obtain awards in their favour thr ough the arbitral procedure prescribed by
BSE. Reference in this regard may be made to bye-law 248 of the bye-laws of
BSE. Only one of the applicants na mely, Mahendra Kumar Saraogi claims to 17
have an award in his favour which was made long after the broker was declared a
defaulter and that would not affect the rights of the appellant. Merely because the
applicants claim to be creditors of the broker does not mean that they get a right to
question the award which the appellant ha s obtained against the broker. Even
BSE and the broker have not challenged the award. How can the applicants do
that? We are satisfied that they have no locus standi to file the present
applications which are misconceived. Accordingly, they are dismissed.
For the reasons recorded above, we allow the appeal and direct BSE to pay
the awarded amount to the appellant from the monies of the broker lying with it.
Since payment to the appellant has been sufficiently delayed for which BSE is to
blame, we further direct it to pay from its own funds interest to the appellant at
the rate of 10% per annum from the date of the award till the date of payment.
Let the needful be done within two weeks. There is no order as to costs.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
S. S. N. Moorthy
Member
After we pronounced the order in Court, the learned counsel for BSE
made an oral prayer to stay the operation of our order to enab le BSE to file an
appeal in the Supreme Court. In case the awarded amount is paid to the appellant
within a week from today, the recovery of interest as awarded by us shall remain
stayed for a period of 4 weeks thereafter.
Sd/-
Justice N. K. Sodhi
Presiding OfficerSd/- S. S. N. Moorthy Member28.6.2011
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