Supreme Court Quashes ₹460-Crore Securities Restitution Against Clearing Members; Holds NSE Clearing Lacked Power and PCMs Had No Duty to Verify Individual Investors’ Positions Before Liquidation
Supreme Court Sets Aside Restitution of ₹460-Crore Securities; Holds Professional Clearing Member Not Liable for Trading Member’s Default or Individual Investors’ Losses
Facts
The appeals arose from losses suffered by individual investors in the Futures & Options (F&O) segment of the National Stock Exchange. The lead appellant was Edelweiss Custodial Services Limited, a Professional Clearing Member (PCM). The central dispute was whether losses suffered by clients of defaulting Trading Members (TMs) could ultimately be imposed upon the PCMs who had liquidated collateral placed with them by those TMs.
In the F&O structure, individual investors place collateral with their Trading Member; the TM, in turn, places its own or clients’ collateral with the PCM. When a TM defaults in meeting settlement obligations, the PCM may liquidate the collateral placed with it to satisfy the outstanding liability.
The controversy arose because defaulting TMs had placed their clients’ securities as collateral with PCMs. When the TMs defaulted, the PCMs liquidated those securities without determining whether each underlying investor individually had a debit or credit balance. Consequently, even investors who allegedly had no outstanding debit balance lost securities.
In the lead matter involving Anugrah Stock & Broking Pvt. Ltd., the NCL’s Member and Core Settlement Guarantee Fund Committee (MCSGFC) found that the PCM had failed to exercise adequate due diligence and directed restoration of securities worth approximately ₹460.32 crore. The PCM argued that by the time of the order their value had exceeded ₹900 crore.
Similar restitution directions were made in the connected matters involving securities worth approximately ₹22 crore, ₹1.95 crore and ₹75.74 lakh.
The Securities Appellate Tribunal upheld the Committee’s orders, leading to the Supreme Court appeals.
Issues
The Supreme Court framed three principal questions:
- Whether a Professional Clearing Member had a statutory obligation to verify the debit/credit position of every individual client of the Trading Member before liquidating collateral, and whether the then-existing regulatory framework gave the PCM visibility of those positions.
- Whether the MCSGFC/NSE Clearing had statutory power to order restitution of securities, and whether such restitution violated natural justice if the proposed penalty had not been specifically notified.
- Whether individual investors could make the PCM liable for defaults committed by the Trading Member, particularly where the TM operated illegal schemes in which investors had voluntarily participated.
Appellants’ Arguments
The PCMs contended that they had no privity of contract with individual investors. Their constituent was the Trading Member, not the TM’s individual clients.
They argued that the regulatory regime prevailing when the securities were liquidated did not impose any obligation upon a PCM to ascertain the individual debit/credit position of every investor. Nor was there an effective mechanism providing the PCM with real-time client-level information.
The PCMs further challenged the jurisdiction of the MCSGFC to order restitution.
According to them, restitution of securities worth ₹460.32 crore was effectively disgorgement or a monetary penalty. Such power belonged to SEBI under Section 11B of the SEBI Act and Section 12A of the Securities Contracts (Regulation) Act, whereas Section 9(3)(b) governing stock-exchange bye-laws specifically excluded penalties involving payment of money.
They also alleged violation of natural justice because the show-cause notice did not specifically propose restitution of the magnitude ultimately imposed.
Respondents’ Arguments
NSE Clearing defended the restitution orders on the basis that PCMs occupy an important position in the clearing and settlement mechanism and are bound by NSE, NCL and SEBI regulations.
According to NCL, a PCM could not indiscriminately liquidate client securities without ensuring that securities belonging to an investor with no debit balance were not used to satisfy another person’s obligations.
The investors similarly contended that the regulatory framework placed clearing members in a position requiring due diligence and protection of client securities.
They argued that the PCMs had powers under their agreements to obtain client-wise margin and constituent information and should have exercised those powers once the TMs repeatedly defaulted.
Analysis of the Law
The Supreme Court undertook a detailed examination of the regulatory structure governing TMs, CMs and PCMs.
No Client-Level Statutory Duty on PCM
The Court drew an important distinction between the responsibilities of a Trading Member and those of a Professional Clearing Member.
A TM deals directly with individual investors. Therefore, the obligation to ensure that one client’s collateral is not used for another client’s liability rests principally upon the TM.
A PCM, by contrast, deals with constituent Trading Members. Its obligation was to maintain separation between collateral belonging to different TMs—not to reconstruct the underlying positions of every investor dealing with those TMs.
The Court found that neither the relevant SEBI circulars, NCL regulations nor the CM-TM agreement imposed upon the PCM a statutory obligation to ascertain every individual investor’s debit/credit position before liquidation.
Indeed, after examining the governing circulars and agreements, the Court concluded that no statutory violation had been committed by the PCMs.
Regulatory Framework Did Not Provide Necessary Visibility
The Court examined how the reporting framework evolved.
The 2016 regime required monthly reporting. In 2019, this moved to weekly reporting. The system progressed to daily reporting only later.
Crucially, the 2019 reporting format did not require disclosure of individual clients’ positions in a manner that gave PCMs real-time visibility before liquidation.
The complete pledge/re-pledge trail enabling identification of the individual investor became effective only from 30 June 2020. Before that date, collateral received from a TM was maintained in a consolidated demat account.
Precedent Analysis
The Court rejected the proposition that restitution could simply be treated as a lesser power included within the greater disciplinary power of suspension or expulsion.
It distinguished authorities dealing with restitution and unjust enrichment because the PCMs had neither been found to have unlawfully enriched themselves nor to have illegally liquidated the collateral.
The Court observed that the PCMs were entitled to liquidate collateral to recoup the Trading Members’ defaults under the regulatory regime then prevailing.
The Court also addressed the SAT’s reliance on its procedural powers. It emphasized that procedural rules cannot create substantive statutory powers. SAT, while exercising appellate jurisdiction, possesses the powers available to the original authority but cannot assume a greater power than the governing statute permits.
Court’s Reasoning
1. No Duty to Verify Every Investor
The Supreme Court answered the first question in favour of the PCMs.
There was no statutory obligation requiring a PCM to verify the debit/credit position of each individual client of a Trading Member before liquidating the collateral placed by that TM.
The regulatory mechanism at the relevant time also did not provide the PCM adequate visibility of individual client positions.
2. NSE Clearing Committee Had No Restitution Power
The second issue was also decided in favour of the PCMs.
Section 9(3)(b) permitted stock-exchange bye-laws to prescribe specified disciplinary sanctions but expressly contemplated penalties not involving payment of money.
In contrast, the legislature specifically vested SEBI with disgorgement powers.
The Court therefore held that NCL could not create for itself a restitution/disgorgement power on broad notions of equity, justice and good conscience when the statute did not confer it.
The restitution order—requiring restoration of securities or blocking an equivalent monetary value plus 5%—was consequently beyond NCL’s statutory authority.
3. Investors Could Not Shift Broker’s Default to PCM
The third question was answered against the investors.
The Court found that no claim could be maintained against the PCM for the Trading Member’s default, particularly where the Trading Member had been operating illegal schemes promising assured returns and investors had knowingly participated in them.
In Anugrah’s case, the Court noted that the TM had operated simultaneously as a Trading Member, Depository Participant and an unauthorized Derivatives Advisory Service, promising fixed returns without the necessary regulatory authorization.
The Court therefore rejected the characterization of all such persons as entirely “innocent investors.”
However, importantly, the Court did not extinguish their remedies altogether. It expressly left the affected investors free to pursue remedies against their respective Trading Members, subject to legal exceptions.
Conclusion
The Supreme Court ruled decisively in favour of the Professional Clearing Members on all three principal questions.
It held that:
- PCMs had no statutory duty to verify individual investors’ debit/credit positions before liquidating collateral;
- the then-existing regulatory framework did not provide adequate visibility of those individual positions;
- NSE Clearing/MCSGFC had no statutory authority to order restitution of the securities;
- the monetary nature of the restitution could not be justified under stock-exchange disciplinary powers; and
- investors could not impose liability upon the PCM for the default of the Trading Member in the circumstances of these cases.
Accordingly, Civil Appeal Nos. 31/2024, 2187/2024, 3179/2024 and 7313/2024 were allowed, and the orders of the MCSGFC Committee and SAT were set aside.
The individual investor’s Civil Appeal No. 4238/2026 was rejected as not maintainable because the underlying orders on which the investor sought to rely had themselves been set aside.
Case Details
Case: Edelweiss Custodial Services Limited v. NSE Clearing Ltd. & Anr.
Citation: 2026 INSC 941
Court: Supreme Court of India
Case Number: Civil Appeal No. 31 of 2024 with Civil Appeal Nos. 7313/2024, 2187/2024, 3179/2024 and 4238/2026
Bench: Justice J.B. Pardiwala and Justice K. Vinod Chandran
Judgment by: Justice K. Vinod Chandran
Date: 2 September 2026
Result: Four appeals by Professional Clearing Members allowed; MCSGFC and SAT restitution orders set aside. Investor’s connected appeal rejected as not maintainable.
