In a significant ruling on the regulatory architecture of derivative markets, a Supreme Court bench comprising Justice J. B. Pardiwala and Justice K. Vinod Chandran held that the Member and Core Settlement Guarantee Fund Committee (MCSGFC) of the NSE Clearing Corporation (NCL) has no statutory authority to order restitution of liquidated collateral securities against Professional Clearing Members (PCMs). Setting aside concurrent orders passed by the MCSGF Committee and affirmed by the Securities Appellate Tribunal (SAT), the apex court ruled that under Section 9(3)(b) of the Securities Contracts (Regulation) Act, 1956 (SCRA), stock exchange byelaws cannot impose penalties involving the payment of money or ordering disgorgement. The Court further ruled that prior to the daily reporting regime introduced by the Securities and Exchange Board of India (SEBI) in July 2021, PCMs had neither privity of contract with the individual clients of Trading Members (TMs) nor any regulatory visibility or statutory obligation to verify individual credit/debit balances before liquidating collaterals upon a broker’s default.
Setting the tone of the dispute, Justice K. Vinod Chandran observed in the judgment: “When the future holds out promises and options for everyone; in the Futures & Options (F&O) Segment they were faced with eternal damnation and loss of valuable securities, lament the individual investors, who are the intervenors in these appeals.”
Background of the Dispute
The controversy arose out of massive defaults in the Futures & Options (F&O) Segment of the National Stock Exchange (NSE). In the multi-tier market hierarchy, individual investors (clients) place collaterals with their share broker or Trading Member (TM). The TM, in turn, proffers collaterals to a Professional Clearing Member (PCM) registered with the clearing corporation, NCL, which guarantees settlement of trades.
Between January and July 2020, broker Anugrah Stock & Broking Private Limited suffered heavy trading losses and defaulted on its settlement obligations. To cover these deficits, Edelweiss Custodial Services Limited (the PCM) liquidated the collaterals deposited with it by Anugrah across 29 instances, amounting to securities valued at Rs. 460.32 crores at the time of liquidation. Consequently, individual clients of Anugrah—including those who had zero debit balances or had no outstanding settlement obligations—lost their securities.
Similar defaults and subsequent liquidations occurred in connected appeals involving other PCMs and their constituent TMs (including VRISE Securities Pvt. Ltd., Action Financial Services (India) Ltd., and Yuvraj Securities).
Aggrieved investors approached SEBI, the SAT, and the High Court, and ultimately sought compensation before the NSE. The MCSGF Committee constituted by the NCL held that the PCMs had failed to exercise due diligence, given the TMs too much leeway, and violated regulatory circulars by selling client securities without ascertaining their individual debit/credit positions. The Committee directed the PCMs to reinstate the liquidated securities within 15 days or face equivalent deductions plus 5% from their available collaterals with NCL, alongside monetary fines. The SAT affirmed these directions, holding that restitution was an inherent, lesser disciplinary measure and invoked its own powers under Rule 21 of the SAT (Procedure) Rules, 2000. The PCMs challenged these decisions before the Supreme Court.
Submissions of the Parties
Appearing for lead appellant Edelweiss, Senior Advocate Shyam Divan argued that the MCSGF Committee lacked statutory jurisdiction to order restitution of securities, which had escalated in value to over Rs. 900 crores. He submitted that restitution is akin to disgorgement, a power exclusively vested in SEBI under Section 11B of the SEBI Act, 1992 and Section 12A of the SCRA. Under Section 9(3)(b) of the SCRA, stock exchange byelaws are strictly confined to penalties such as fines, expulsion, and suspension, and explicitly bar “any other penalty of a like nature not involving the payment of money.” He further argued that under the weekly reporting framework operating in 2019–2020, PCMs possessed neither the mechanism nor any statutory duty to ascertain individual client balances, and that privity of contract existed exclusively between the PCM and the TM. Senior Advocates Niranjan Reddy and Amar Nath Saini, representing the other PCMs, echoed these submissions, pointing out that client collaterals were maintained on a gross, consolidated basis prior to June 2020.
Countering the appeals, Senior Advocate Arvind P. Dattar, appearing for the NCL, argued that the power of expulsion encompasses the lesser power of restitution, relying on the Constitution Bench judgment in Ahmedabad St. Xavier’s College Society v. State of Gujarat. Relying on Director of Enforcement v. M.C.T.M. Corporation Pvt. Ltd. and Shiv Dutt Rai Fateh Chand v. Union of India, he contended that penalty is a broader concept designed to enforce discipline and ensure market integrity. He also cited South Eastern Coalfields Ltd. v. State of M.P., Kavita Trehan v. Balsara Hygiene Products Ltd., and Dr. Poornima Advani v. Government of NCT to submit that restitution is an inherent power exercisable whenever justice demands restoring property to its rightful owner.
Appearing for the investors, Senior Advocate Meenakshi Arora contended that PCMs discharge clearing functions in a fiduciary capacity and violated SEBI circulars dated 17.04.2008, 26.09.2016, and 20.06.2019, as well as NCL Regulations 1.7, 4.5.4, and 10.2.4. Relying on Indian Council for Enviro-Legal Action v. Union of India, she argued that PCMs cannot escape liability for unjust enrichment after indiscriminately liquidating client collaterals without basic due diligence.
The Court’s Analysis
The Supreme Court examined the operational mechanics of the F&O segment and the regulatory framework under the SCRA, SEBI circulars, and NCL Regulations.
Addressing the definition of “Client/Constituent” in Regulation 1.7 and the prohibition in Regulation 4.5.4 against utilizing one client’s margin monies for another, the Court clarified that for a PCM, the constituent is the TM, whereas for the TM, the constituent is the individual investor. Therefore, the prohibition on a PCM is against using collaterals proffered by one TM to meet the debts of another TM.
The Court noted that Anugrah had illegally operated “three hats”—acting simultaneously as a TM, a Depository Participant (DP), and providing unauthorized Derivatives Advisory Services (DAS) offering fixed returns of 12% per annum under schemes named ‘Gold’ and ‘Platinum’ in the nature of Portfolio Management Services (PMS) without holding mandatory SEBI registration. SEBI proceedings had established that Anugrah had systematically mis-utilized and misappropriated client securities as far back as 2017–2018. The Court observed:
“Neither can the TM absolve itself from its liabilities nor can the investors cry foul, since they entered into the scheme with full knowledge of their securities being offered as collaterals for a fixed return. The responsibility of the assured return is only on the TM and not even indemnified by the NSE; being an outright illegal activity.”
Examining the regulatory evolution, the Court observed that under SEBI’s 2016 circular and NCL’s circular of 20.05.2019, reporting of collaterals was periodic (monthly and weekly) and submitted scrip-wise in consolidated accounts tagged as ‘client margin or collateral’. The requirement of a transparent depository trail through margin pledge and re-pledge was introduced only via SEBI’s circular dated 25.02.2020 (effective 30.06.2020), while comprehensive real-time, daily reporting of client-level collateral disaggregation was brought in through SEBI’s circular dated 20.07.2021. The Bench held that during the subject liquidations in early 2020, PCMs lacked both visibility of individual client ledger balances and any statutory duty to verify them prior to enforcing collaterals.
On the issue of jurisdiction, the Court rejected NCL’s reliance on the doctrine of lesser power being ensconced in the greater power of expulsion. Emphasizing the explicit wording of Section 9(3)(b)(iv) of the SCRA, the Court held:
“The Legislature while conferring the power of disgorgement on the SEBI, in two related statutes, consciously omitted it from being conferred under the byelaws of a stock exchange; which cannot be brought in, that too against the specific statutory bar, on grounds of equity, justice and good conscience.”
The Court also rejected the invocation of procedural powers by the SAT under Rule 21, reiterating the principle laid down in SEBI v. S. Kumars Nationwide Ltd. that an appellate tribunal cannot assume substantive powers beyond what the statute permits the original authority. Case precedents on restitution under Section 144 of the Code of Civil Procedure (South Eastern Coalfields) and unjust enrichment (Indian Council for Enviro-Legal Action) were distinguished on the ground that the liquidation by the PCMs was legally permissible under the regulatory framework then in force to recoup their own imminent settlement losses.
Dismissing the argument that “innocent investors” were victimized, the Bench observed:
“The respondents repeatedly, in a chorus, argued about the life savings of ‘innocent investors’ having been frittered away. We are unable to countenance the assertion, since innocence, can neither be attributed on the investor nor on the activity they indulged in, which inherently is highly speculative and hence volatile and fragile.”
Highlighting studies on retail losses in algorithmic derivative trading, the Court added:
“The investor with open eyes dives into the vortex, hoping for easy money, but without anticipating the undercurrents, which could take them into the abyssal depths of penury and debt, where they would be buried forever.”
The Decision
Answering all three questions of law in favour of the PCMs and against the NCL and investors, the Supreme Court allowed Civil Appeal Nos. 31 of 2024, 2187 of 2024, 3179 of 2024, and 7313 of 2024, quashing and setting aside the orders of the MCSGF Committee and the SAT. Civil Appeal No. 4238 of 2026, filed by an individual client seeking restitution of cash margins, was dismissed as not maintainable. The Court granted liberty to the affected client-investors to pursue their legal remedies against their respective defaulting Trading Members, subject to just exceptions.
Case Title: Edelweiss Custodial Services Limited Versus NSE Clearing Ltd. & Anr.
Case No.: Civil Appeal No. 31 of 2024 (with Civil Appeal Nos. 7313 of 2024, 2187 of 2024, 3179 of 2024, and 4238 of 2026)
Bench: Justice J. B. Pardiwala and Justice K. Vinod Chandran
Date: September 02, 2026
