Clearing Members Cannot Be Forced to Repay Investors for a Broker’s Illegal F&O Schemes: Supreme Court Strikes Down ₹460 Crore Restitution Order
Case Name: Edelweiss Custodial Services Limited v. NSE Clearing Limited and Another
Date of Judgment: 2 September 2026
Citation: 2026 INSC 941
Bench: Justice J.B. Pardiwala and Justice K. Vinod Chandran
Held: The Supreme Court held that, under the regulatory framework prevailing before the introduction of SEBI’s client-level daily collateral reporting regime in 2021, a Professional Clearing Member did not have a statutory obligation to verify the individual debit or credit positions of every client of a defaulting Trading Member before liquidating the collateral furnished by that Trading Member. The then-existing reporting framework did not provide Professional Clearing Members with real-time visibility of the positions of the Trading Member’s individual clients. In the absence of such visibility, statutory obligation and contractual privity, a Professional Clearing Member could not be directed to compensate individual investors for losses resulting from the Trading Member’s default and illegal activities.
The Court further held that NSE Clearing Limited and its Member and Core Settlement Guarantee Fund Committee had no statutory authority to order restitution of the securities liquidated by Professional Clearing Members. Section 9(3)(b) of the Securities Contracts (Regulation) Act, 1956 expressly restricts the penalties that may be prescribed through stock-exchange bye-laws and prohibits a monetary penalty of the nature imposed in the present case. The specific power to direct disgorgement is conferred upon SEBI under Section 11B of the SEBI Act and Section 12A of the Securities Contracts (Regulation) Act. Such a power cannot be assumed by NSE Clearing or its Committee on considerations of justice, equity and good conscience when the governing statute does not confer it and, in fact, contains a contrary limitation.
The Securities Appellate Tribunal, while hearing an appeal from a statutory authority, possesses the powers available to the original authority but cannot assume a substantive power wider than that conferred upon the authority by the governing statute. A procedural provision allowing the Tribunal to regulate its proceedings cannot become a source of an otherwise nonexistent power to grant restitution.
Summary: The appeals arose from defaults committed by Trading Members operating in the Futures and Options segment of the National Stock Exchange. Individual investors placed securities and other collateral with their respective Trading Members, who, in turn, deposited consolidated collateral with Professional Clearing Members. When the Trading Members failed to discharge their settlement obligations, the Professional Clearing Members liquidated the securities placed with them to meet those defaults.
Several investors whose accounts allegedly had credit balances or no outstanding debit claimed that their securities had been sold indiscriminately. They contended that the Professional Clearing Members were required to examine their individual account positions before liquidating the collateral. The Professional Clearing Members, however, maintained that they had no contractual relationship with the Trading Members’ individual clients and that the regulatory system then in force did not provide visibility of the clients’ real-time debit and credit positions.
In the lead case, the defaulting Trading Member was Anugrah Stock & Broking Private Limited. Anugrah was simultaneously operating as a Trading Member, Depository Participant and an unauthorised Derivatives Advisory Service. It offered schemes styled as “Gold” and “Platinum,” promising fixed returns of approximately twelve per cent per annum in the highly speculative F&O segment. Investors deposited securities under affidavits and undertakings authorising their use as collateral. Anugrah used these securities for its own trading activities, suffered losses and defaulted upon its obligations.
Proceedings initiated by SEBI revealed that Anugrah had misused client funds and securities, failed to segregate the assets of different clients, pledged securities beyond the clients’ respective obligations and inaccurately reported collateral positions. A substantial shortfall of securities was also detected. While recognising these findings, the Supreme Court clarified that it was not adjudicating the validity of the separate SEBI orders and referred to them only to understand the factual background.
The Member and Core Settlement Guarantee Fund Committee constituted by NSE Clearing found that the Professional Clearing Members had failed to conduct adequate due diligence and had given excessive latitude to the defaulting Trading Members. In the lead appeal, it directed restoration of securities valued at approximately ₹460.32 crore at the time of liquidation. If restoration was not completed within fifteen days, NSE Clearing was directed to block an amount equivalent to the prevailing value of the securities on the sixteenth day, together with an additional five per cent, from the Professional Clearing Member’s available collateral. A separate penalty of ₹1 lakh was also imposed.
Similar restitution orders were passed in the connected matters concerning securities worth approximately ₹22 crore, ₹1.95 crore and ₹75.74 lakh. The Securities Appellate Tribunal affirmed the Committee’s orders, holding that restitution was a permissible and equitable remedy and could be treated as a lesser measure included within the greater disciplinary power of suspension or expulsion.
The Supreme Court examined the respective positions of Trading Members and Professional Clearing Members under the applicable NSE Clearing Regulations, SEBI circulars and Clearing Member-Trading Member agreements. It held that the obligation to segregate the funds and securities of individual investors and prevent one client’s assets from being used for another client’s liabilities primarily rested upon the Trading Member. A Professional Clearing Member’s constituent was the Trading Member, and its obligation was to maintain the collateral of each Trading Member separately from that of other Trading Members.
The Professional Clearing Members involved in the appeals did not undertake proprietary trades or deal directly with individual investors. No allegation existed that they had used the collateral of one Trading Member to satisfy the dues of another. The Court therefore found no violation of the regulations governing the relationship between a Professional Clearing Member and its constituent Trading Members.
The pre-2021 system required periodic or weekly reporting of consolidated collateral information. Although Professional Clearing Members could obtain certain client-related information from Trading Members, there was no statutory obligation or functional mechanism enabling them to ascertain each investor’s real-time debit or credit position before liquidating collateral following a Trading Member’s default. The collateral was held in consolidated accounts, and the complete trail of client-level pledge and re-pledge was introduced only through later regulatory reforms.
On the power to order restitution, the Supreme Court held that the Committee’s direction effectively required payment of money and operated as disgorgement. While SEBI possesses an express statutory power to order disgorgement, no comparable authority was conferred upon NSE Clearing or its Committee. The legislature’s conscious conferment of this power upon SEBI, coupled with the restriction in Section 9(3)(b) of the Securities Contracts (Regulation) Act, prevented NSE Clearing from invoking general notions of equity to assume such jurisdiction.
The Court also rejected the view that restitution could be treated as a lesser power included within the greater power of expulsion. A statutory authority must act within the powers expressly or necessarily conferred upon it. The existence of a severe disciplinary power cannot be used to manufacture a distinct monetary remedy that the statute does not permit.
The Supreme Court found no unjust enrichment by the Professional Clearing Members. They liquidated the collateral to recover obligations owed by the defaulting Trading Members and to prevent their own collateral from being liquidated by NSE Clearing. Consequently, general principles of restitution applicable to wrongful enrichment, reversal of court orders or restoration of an improperly obtained benefit could not justify the directions issued against them.
The Court further held that investors who knowingly participated in unauthorised schemes promising fixed returns in the volatile F&O segment could not claim compensation from Professional Clearing Members for the Trading Member’s misconduct.
Decision: The Supreme Court allowed the restitution orders passed by the Member and Core Settlement Guarantee Fund Committee and the corresponding decisions of the Securities Appellate Tribunal.