BbFrom Our Bureau
NEW DELHI: The Supreme Court has reversed the Bombay High Court’s ruling in August 2019 attaching the properties of the National Spot Exchange Limited (NSEL) of Jignesh Shah in Mumbai under the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act).
The Maharashtra government came in appeal to let the top court decide whether NSEL is a financial establishment or not to come under the Act for protecting the traders dealing on the exchange for spot trading in commodities since 2007.
A Bench of Justices Dr Dhananjaya Y Chandrachud, Surya Kant and Bela M Trivedi set aside the HC judgement on Friday and held that the notifications issued under Section 4 of the MPID Act attaching properties of the respondent are valid, deciding the matter on merits.
The NSEL was set up as a company as a wholly owned subsidiary of Financial Technologies (India) Limited, which is now known as 63 Moons Technologies Limited. It got into the commodities trading, taking advantage of a Central notification under the Forward Contracts (Regulation) Act of 1952, exempting forward trading of one-day duration for sale and purchase of the commodities traded on NSEL.
NSEL started operating as an exchange for spot trading in commodities by launching contracts for buying and selling of commodities on its platform with different settlement periods from 1 to 36 days, taking 1% commission. It offered paired contracts to enable a trader to buy himself or through the broker and the seller through the broker put the commodities for sale.
The seller has to deposit the stock in a warehouse accredited to NSEL for delivery within two days. Once the stock reached warehouse, NSEL will transfer the money to the seller and ask the buyer to lift the stock. NSEL came under the trap of the Department of Consumer Affairs in April 2012 on finding 13,000 persons trading on the platform defaulted in the payment of Rs 4,600 crore.
In September 2014, the Centre withdrew the exemption granted to NSEL for commodity trade, after the Forward Markets Commission stepped in and ordered a check on quality and quantity of commodities in the accredited warehouses as also the financial status of buyers and trading members to fix liability on the promoters of NSEL.
Inquiries showed that the transactions were not accompanied by physical delivery of goods and in many cases, the accounts of NSEL and the suppliers of the goods did not tally. The MPID Act came into play that defines “financial establishment” any person accepting any deposit under any scheme.
The properties of NSEL and its owners were attached under MPID Act since NSEL accepted money but failed to return and there is no reference to a deposit founded on the acceptance of the commodities. “Deposit” under the MPID Act covers only the “valuable” commodity, restricting it to gold, silver and other precious metals while NSEL trade in agricultural commodities and steel. Agricultural commodities are not covered by the definition.
NSEL tried tow wriggle out on the ground that the traders participating on its platform are corporate traders and not the small depositors who the MPID Act seeks to protect. NSEL also tried to plead that it has no control over the money received from the traders since it is a pass through platform, where the money is sent to the counter party’s brokers on the same day.
Senior advocate Mukul Rohatgi, appeared for 63 Moons company to plead that NSEL runs a commodity exchange, similar to a stock exchange and as such it is only a transacting medium and neither collects deposits nor does it assure interest on returns, receiving a 0.1% commission at the rate of Rs 100 per one lakh of the trade value. His plea that MPID Act’s Section 4 is arbitrary and constitutionally invalid was rejected by the Court.
