Supreme Court frees clearing members of liability for liquidating defaulting broker's client collateral
A bench of Justices J.B. Pardiwala and K. Vinod Chandran held Professional Clearing Members had no duty to verify individual clients' positions and no restitution power existed under stock exchange byelaws.
The Supreme Court has set aside orders directing Professional Clearing Members (PCMs) to restore securities worth hundreds of crores that were sold off when the trading member Anugrah Stock & Broking Private Limited and other brokers defaulted. In Edelweiss Custodial Services Limited v. NSE Clearing Ltd. & Anr., decided on 2 September 2026, the Court found the clearing members committed no statutory violation when they liquidated collateral proffered by the defaulting brokers.
The judgment, authored by Justice K. Vinod Chandran, held that a PCM had neither privity of contract with the individual clients of a trading member nor any obligation to verify their debit/credit positions before liquidating collateral. The Court also held that the Member and Core Settlement Guarantee Fund Committee (MCSGFC), constituted by NSE Clearing Ltd. (NCL), had no power to direct restitution, which amounted to disgorgement barred under the governing statute and byelaws.
How the dispute reached the Court
The appeals arose from the F&O segment of the National Stock Exchange, where clearing and settlement are managed by NCL, a subsidiary of the NSE. Under the hierarchy, PCMs deal only with their constituent trading members and have no proprietary trades or individual clients. Trading members in turn handle the individual investors.
The defaults were by the trading members, whose collateral was sold in the market. The individual investors — described in the judgment as intervenors and speculators — lost securities they had offered, including some who had no debit balance. The trading members were defunct and bankrupt.
The investors approached SEBI, the Securities Appellate Tribunal (SAT) and the High Court without success, then sought compensation before the NSE. A committee appointed by NCL awarded compensation, holding the PCMs guilty of giving the trading members too much elbow room and liquidating securities without complying with the regulatory mechanism. The SAT confirmed the committee's order.
In the lead case, the liquidated securities were worth about Rs.460.32 crores on the date of sale and in excess of Rs.900 crores by the date of the order. The committee directed the appellant to reinstate the securities within 15 days, failing which an amount equal to their value on the 16th day plus 5 per cent of market value was to be blocked from the PCM's collateral with NCL, along with a penalty of Rs.1 lakh.
No duty on the PCM to verify individual clients' positions
The Court examined the NCL's F&O Regulations, the CM-TM agreement, and SEBI circulars dated 17 April 2008, 26 September 2016 and 20 June 2019, along with the NCL circular dated 20 May 2019. It held that for a PCM the client or constituent is the trading member, and for the trading member the client is the individual investor.
Regulation 4.5.4, which prohibits utilisation of one client's margin against another's dues, meant only that collateral of one trading member could not be used against another's dues. Since the PCMs had no proprietary trades and no allegation of cross-use between trading members arose, no violation was found.
On visibility, the Court found the reporting mechanism did not require the trading member to disclose individual clients' positions in the uploads. The 2016 circular required only monthly uploading, and the 2019 weekly reporting did not include individual client positions. The Court traced the progression — monthly reporting in 2016, weekly in 2019, and daily in 2021 — noting that real-time visibility of individual client collateral came only with the SEBI circular of 20 July 2021 on segregation and monitoring of collateral at client level. Before 30 June 2020, when the pledge/re-pledge trail became effective, the trading member collected collateral on a gross basis and the clearing member maintained it in a consolidated demat account.
“There is no statutory obligation cast on the CM,” the Court said of liquidation after ascertaining constituents' positions.
The restitution order was disgorgement without power
The Court held that Section 9(3)(b) of the Securities Contracts (Regulation) Act, 1956 empowers stock exchanges to make byelaws providing for fine, expulsion, suspension, or any other penalty not involving payment of money. By contrast, the power of disgorgement was conferred on SEBI under Section 11B of the SEBI Act, 1992 and Section 12A of the Securities Act.
The committee's direction to restore liquidated shares, and in the alternative to block their value plus 5 per cent, was a prescription for payment of money. The Court found this in stark violation of the statute, which consciously omitted disgorgement from byelaws made under Section 9. Such power could not be brought in on grounds of equity, justice and good conscience against a specific statutory bar.
The Court distinguished the authorities relied on by NCL. Indian Council for Enviro-Legal Action rested on the polluter-pays principle and unjust enrichment, absent here since no illegality in the liquidation was found. South Eastern Coalfields, Kavita Trehan and Dr. Poornima Advani concerned restitution following reversal of interim orders under Section 144 or Section 151 of the Code of Civil Procedure, with no comparable decree or reversal present.
The broker's Ponzi scheme and the investors' role
The Court recorded that Anugrah wore three hats — trading member, depository participant, and derivatives advisory service assuring fixed returns in the nature of portfolio management, which it was not licensed to offer. Investors deposited securities for fixed returns under schemes termed “Gold” and “Platinum”, promising assured returns of 12 per cent per annum, an activity the Court described as outright illegal and known to both the trading member and its clients.
SEBI orders had found that Anugrah misused client funds and pledged securities over and above client obligations, with a shortfall of Rs.683.87 crores in the Register of Securities. The Court cited these findings on facts without commenting on the orders.
Declining to accept the “innocent investors” framing, the Court observed that innocence could not be attributed to investors who entered a highly speculative segment with open eyes on the promise of assured returns. It cited a report noting that retail traders lost Rs.74,800 crores net in FY 2024, bringing “knives to a gun fight” against algorithmic desks.
The SAT's reliance on procedural rules
The Court cautioned against the SAT's reliance on Rule 21 of the SAT (Procedure) Rules, 2000 as a source of substantive power to direct restitution suo motu. A procedural rule enables the tribunal to regulate its procedure and cannot be treated as a carte blanche. Referring to SEBI v. S. Kumars Nationwide Ltd., the Court held the SAT cannot assume greater power than the statute permits.
Outcome
The Court answered all three framed questions of law in favour of the PCMs and against NCL and the investors. It found no statutory obligation on the PCM to verify debit/credit positions, no regulatory visibility of those positions before the liquidation, no power in NCL or its committee to order restitution, and no claim maintainable by the investors against the PCM for the trading member's default.
Civil Appeal Nos.31 of 2024, 2187 of 2024, 3179 of 2024 and 7313 of 2024 were allowed, setting aside the orders of the MCSGF Committee and the SAT. Civil Appeal No.4238 of 2026, filed by a client-investor, was rejected as not maintainable, the impugned orders having already been set aside. The Court left the constituents of the trading members at liberty to pursue remedies against their respective trading members, subject to just exceptions.