Securities Appellate Tribunal: SAT, Mumbai dismissed two appeals claiming compensation from the National Stock Exchange’s Investor Protection Fund stating that loan transactions were not protected by the NSE bye-laws.
The appellants opened a trading account with one Kassa FinServ (“Kassa”) by depositing some money and receiving interest/loyalty bonus on the unused margin money. In pursuant to many complaints, the Securities and Exchange Board of India (“SEBI”) passed an ad-interim order prohibiting Kassa from trading in securities, pursuant to which the appellants filed claims before the National Stock Exchange’s (“NSE”) Investor Grievance Resolution Panel (“IGRP”) which admitted their claims. The NSE also expelled Kassa from its trading members and published an advertisement inviting claims against Kassa, and the appellants then submitted their claims under the Investor Protection Fund (“IPF”) to the NSE’s Defaulter’s Committee (“DC”), which rejected their claims, holding:
i. Since the opening of their accounts, the appellants did not engage in any trading in securities.
ii. The transactions between Kassa and the appellants were in the form of a loan and not margin for trading in securities.
The appellants resisted this claiming that their claim has been admitted by the IGRP and the NSE is bound to pay them. The appellants also claim that they had suspended trading to wait for better market conditions, whatever amount they received from Kassa was in the nature of dividends and they were under the bona fide belief that Kassa was operating as per law. When they did sense problems, they complained to the SEBI and NSE but no action was taken till a year later.
Another group of investors made similar arguments since their claims too, were rejected by the NSE DC on grounds that their transaction was in form of the loan over which they had received interests and TDS had been deducted on that amount as well. It was also argued that the suspension in trading was on advice by Kassa to wait for ideal market conditions.
The appellants submitted that since the brokers were regulated entities, the default by Kassa was a result of the failure of regulators lie NSE and SEBI to take timely steps despite consumer complaints and hence they, being innocent customers, must be compensated from the IPF.
The counsel for the NSE and the SEBI contended that the NSE bye-laws explicitly prohibit IPF being utilized to compensate those who are a client-broker relationship instead of an investor-broker relationship since the former is a loaning activity, and Bye-law 24(d) of Chapter XII of the NSE Bye-Laws reads:
“Certain claims not to be entertained:
(24) The Defaulters’ Committee shall not entertain any claim against a defaulter:
a.-c * * *
d. which is in respect of a loan with or without security,”
The counsel for NSE submitted that this is done to protect genuine investors from those who loan money in return for predetermined percentage returns which are in the form of interest and not dividends, amounting to the illegal activity of para-banking. Hence the appellant’s claim lay not against IPF but against Kassa, its promoters and directors, as was ordered by a Whole Time Member (“WTM”) of the SEBI. A later order by the WTM of SEBI also observed that NSE had taken all steps it could to prevent loss to investors hence the appellants could not claim liability on NSE for not doing enough.
SAT held that evidence indicated the nature of transactions between the appellants and Kassa was of furnishing loans and gaining interest at fixed rates on it. It was not an investment activity sought to be protected by the IPF bye-laws and hence the DC was correct in terming the appellants’ claims as inadmissible. Further, NSE could not be held responsible for willful violations by the appellants and their broker. The appeals were accordingly dismissed. [Kabir Oberoi v. Securities and Exchange Board of India,2018 SCC OnLine SAT 54, decided on 17-05-2018]
