EDELWEISS CUSTODIAL SERVICES LIMITED Vs. NSE CLEARING LTD.

JUDGEMENT

(1.) When the future holds out promises and options for everyone; in the Futures and 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. Whether the reparations are to be borne by the Share Broker, herein termed the Trading Member (TM) or the Professional Clearing Member (PCM), the appellants herein, is the dispute raised by the appellants, who distance themselves from the individual clients/investors, on the ground of absence of privity of contract with those clients of the TM and lack of visibility of their debit/credit positions.

(2.) First, a broad overview of the hierarchy and the operations in the Stock Exchange; here the National Stock Exchange (NSE), the 2nd respondent in Civil Appeal No.31 of 2024, which appeal is taken as the lead case and the documents referred to therefrom, unless otherwise specified. The operations, of clearing and settlement of the various transactions are controlled by the NSE Clearing Corporation (NCL), a subsidiary of the NSE. The hierarchy in the NSE, is that, under its subsidiary, the NCL, termed the Clearing Corporation, there are three types of Clearing Members: Clearing Members (CM), Professional Clearing Members (PCM) and Self-Clearing Members (SCM). A CM does proprietary trades on its own account, has its own clients and also handles the proprietary trades of the TM and their clients. A Self-Clearing Member trades in its own account and also for and on behalf of its clients; while a PCM deals only with their constituent TMs and do not have proprietary trades or individual clients. The PCM is registered only with the NCL while CM and SCM are registered with the NSE and the NCL. The PCMs have as their constituents a number of TMs, who in turn have clients, the individual investors, who through their respective TMs carry out the operations in listed shares and other derivatives on the platform provided by the NSE.

(3.) As for the operations, a brief overview of the mechanism of the F&O Segment, as understood from the records is necessary. F&O Segment deals in major stock derivatives traded in the stock market, recognized under Sec. 18A of the Securities Contract (Regulations) Act, 1956[ For short, the Securities Act]. Though the F&O Segment operates in a complex manner, simply put, it allows investors to buy or sell or lock in the prices of, an underlying asset such as a stock, index or commodity at a future date without actually owning it. Contracts are entered for trading a stock asset at a pre-determined price, applicable on a later date. The NCL ensures that the money and security change hands safely on completion of the trade and the obligation of investors to each other are duly met. The NCL acts as a regulatory body in the operation of the trading platform of the NSE and provides a settlement guarantee to the participants. The investment made can lead to astronomical profits, without any actual purchase or sale being carried out, or lead to massive losses, often driving the speculators to penury. Quick money is the lure and therein lies the trap too.