The National Spot Exchange Limited (NSEL) let out a huge sigh of relief, as the High Court of Bombay (High Court) in the case of 63 Moons Technologies Ltd. v. The State of Maharashtra declared that NSEL does not fall within the ambit of "financial establishment" under the Maharashtra Protection of Interests of Depositors in Financial Establishments (MPID) Act, 1999. This issue is of great significance to a plethora of industries that regularly deal with financial transactions, and act as facilitators or intermediaries to transactions that involve money changing hands.

The petitioner, 63 Moons Technologies Ltd. challenged the constitutional validity of Sections 4 and 5 of the MPID Act being violative of Articles 14, 19 and 300A of the Constitution of India (Constitution), and the attachment of the petitioner's assets by the State of Maharashtra by exercising its powers under the MPID Act. The FIR registered against NSEL alleged that the money collected by NSEL from the investors fell within the definition of the term "deposit" as per section 2(c) of the MPID Act. Due to the inability of NSEL to make payments and the insufficiency of its assets, the assets of its holding company (the petitioner), its promoters and directors were attached under the MPID Act.

The petitioner's axial argument since the inception of the disputes was reiterated and finally accepted by the High Court, that NSEL was an electronic platform for trading of forward contracts in commodities of one day duration, between willing buyers and sellers, acting through their respective brokers. NSEL never accepted any deposits, and does not fall under the definition of "financial establishment" as defined under Section 2(d) of the MPID Act.

An interesting aspect highlighted in this judgement is the faulty investigation conducted by the investigating agencies, and the misapplication of the law which gave them sweeping powers to attach any assets that they deemed fit, causing unnecessary hassle to the accused.


NSEL had launched contracts for buying and selling of commodities on its trading platform with different settlement periods ranging from T+0 days to T+36 days. In the aforesaid contracts, the word 'T' denotes the trade date i.e. the day on which the trade took place and '+0' or '+36' is referred to as number of business days after which the delivery of commodity and payment of price therefor, was to be effected by the Buying Trading Member and Selling Trading Member, as the case may be. Under these contracts, according to the petitioner, a quantity of particular commodity would be bought and sold on the exchange of T+2 basis and at the same time, the buying trading member and the selling trading member would resell the commodity on T+25 basis. In this whole process of buying and selling of commodities, NSEL's role was limited to providing an electronic platform for the purpose of trading in these commodities.


The core issues before the High Court were:

1) Whether the said establishment is a 'financial establishment'.
2) Whether it has accepted 'deposits' within the ambit of the MPID Act.


Misreading of Section 4 of the MPID Act and the surmounting vagueness

The Petitioner contended that the notification under challenge attached the petitioner's two bank accounts with HDFC bank under section 4(2) of the MPID Act. In terms of Section 4 of the MPID Act, the Government ought to have first attached and liquidated the assets acquired out of the deposits and it is only after liquidating such assets, if there was a shortfall in repaying the alleged investors, then the assets of any other person, including the petitioner, should have been attached. The misreading of the provisions of law were the sole basis of the notifications, and thereby required to be quashed and declared ultravires.

The Petitioner extended the following contention to challenge the constitutionality of Section 4 of the MPID Act-

"The said relief is sought to be justified on the ground of the vagueness and possible area of misinterpretation leading to the gross abuse and misuse of the latter portion of clause (ii) of subsection (1) of Section 4 being susceptible of a misuse because of the words "such other property" instead of any other property offering in the last part of the section which has a vital impact when read with "As the Government may think fit" and unless the decision of the Government is directed to be guided by these yardsticks, the provisions can be subjected to misuse. The provisions of subsection (2) of Section 4 is also challenged as expropriatory in nature and as violative of Article 300A of the Constitution."

NSEL does not accept 'deposits'

Deposits under the MPID Act has been defined as-

"deposit" includes and shall be deemed always to have included any receipt of money or acceptance of any valuable commodity by any Financial Establishment to be returned after a specified period or otherwise, either in cash or in kind or in the form of a specified service with or without any benefit in the form of interest, bonus, profit or in any other form, but does not include

  1. amount raised by way of share capital or by way of debenture, bond or any other instrument covered under the guidelines given, and regulations made, by the SEBI, established under the Securities and Exchange Board of India Act, 1992 (15 of 1992);
  2. amounts contributed as capital by partners of a firm;
  3. amounts received from a scheduled bank or a co-operative bank or any other banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
  4. any amount received from,
    1. the Industrial Development Bank of India,
    2. a State Financial Corporation,
    3. any financial institution specified in or under; section 6-A of the Industrial Development Bank of India Act, 1964 (18 of 1964), or
    4. any other institution that may be specified by the Government in this behalf;
  5. amounts received in the ordinary course of business by way of,-
    1. security deposit,
    2. dealership deposit,
    3. earnest money,
    4. advance against order for goods or services;
  6. any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in the State; and
  7. any amount received by way of subscriptions in respect of a Chit."

The contentions assailing the 'financial establishment' status of NSEL were:

a) There was no receipt of 'deposits' by NSEL so as to confer jurisdiction on the respondent to invoke and apply the provisions of MPID Act qua NSEL and consequently, qua the petitioner.

b) NSEL is not a 'financial establishment' but an electronic platform to conduct trade in commodities in forward contracts where amounts paid in and paid out including margins represent the price of the goods bought and sold.

c) The trading mechanism of NSEL was explained by the Petitioner to substantiate its argument. The T+2 and T+25 contracts which were traded together, were also referred to as 'paired contracts' where the buyer/investors would enter into a contract to buy a commodity with T+2 delivery cycle and simultaneously buyer/investor would also enter into a contract to sell the commodity with T+25 delivery cycle with the same parties as the first contract. Therefore, the defaulter in this case was the broker (member of the Exchange) who was the seller of the T+2 contract and defaulted on buying back the commodity on the expiration of the 25th day. The trade in commodity was done on their own account. The money deposited with NSEL on T-2 was immediately paid to the sellers at the T-2 date.

Thus, NSEL cannot be termed as a 'financial establishment' to attract the provisions of MPID and these transactions were governed by their own byelaws, with the rights and obligations clearly spelled out requiring pre-registration.

c) The withdrawal of exemption under the Forward Contract Regulation Act (FCRA) cannot make NSEL, and consequently its promoter liable under MPID as there are separate penal consequences prescribed in FCRA itself for violation of its provisions and in fact, the EOW Mumbai has already registered a separate FIR under the FCRA against NSEL and the brokers for acting in breach of the provisions of the Act.

(d) The definition of 'financial establishment' must by necessary implications exclude an exchange/future market to avoid conflict with the legislative powers of the Parliament under Entry 48 of List I of Schedule-VII of the Constitution of India. Entry 48 covers stock exchanges and gives exclusive powers to the Union Government to make laws on the same.

(e) It is an established fact that the petitioner has not received any part of the sum of Rs.5600 crores alleged to have been received by NSEL as the alleged 'deposits' and the properties of the petitioner are not acquired out of the alleged deposit purportedly collected by NSEL.

(f) The assets/property is already attached by the respondent are sufficient to cover the amount currently outstanding which is about Rs. 4822 crores.


NSEL is a financial establishment accepting deposits

The broad submissions made to counter the petitioner were: (i) All the parties trading on the NSEL platform were forced to execute paired contracts of T+2 and T+25 simultaneously.

(ii) None of the parties were given a choice to make any singular trades and the trades had to be in paired contracts.

(iii) The price for the paired contracts, at the stage of buy and sell i.e. for T+2 and T+25 was fixed beforehand and simultaneous contracts were executed at the same time.

(iv) NSEL represented to the investors that it was giving fixed returns, and the price difference between T+2 and T+25 was ranging between 14% to 16% per annum.

The amount which the buyer paid was received by NSEL, and thereafter disbursed to a purported seller who was really a borrower who got an unsecured loan from the exchange, and this buyer was promised a rate of return of 14% to 16%. The purported seller who was really a borrower from exchange availed this unsecured loan. The contention that money when received was given to the purported sellers, and when repaid was given to the original buyer, is totally misleading assertion and on the other hand, his submission is that money was received by NSEL from investors, and it was passed on to borrowers by NSEL and the entire transaction was a financial transaction.

To substantiate this submission, it was further submitted that the actual transaction between NSEL and borrowers are not supported with actual delivery of goods and in many cases, the accounts of the NSEL and borrowers did not match with each other due to unilateral bogus entries made by either of the parties to suit and accommodate each other. It was further submitted that the investigation has also concluded that the physical delivery of the commodities had not been checked and there was no control over the stock lying in warehouses and in fact, the entire financial mishap had occurred due to the collusion between NSEL, its owners, Directors, management, sellers, borrowers and others

MPID's constitutionality is settled

The validity of MPID cannot be questioned since it has already been upheld by the Supreme Court in case of K.K. Baskaran v. State (2011) 3 SCC 793 which has upheld the judgment of the Tamil Nadu High Court, where the validity of Tamil Nadu Protection of Interest of Depositors Act, 1997 came to be upheld.
The Respondent submitted that the interpretation placed by the petitioner on Section 4 of the MPID Act is a misconceived one and the attachment contemplated under Section 4(2) for the promoter is only on the contingency mentioned in the section i.e. the financial establishment has failed to return the deposit after maturity, and if the Government has reason to believe that such financial establishment is acting in a calculated manner detrimental to the interest of depositors, with intention to defraud them and if the Government is satisfied that such financial establishment is not likely to return the deposit or make the payment of interest or other benefits assured. This provision enables to fasten the liability on the persons who are in control and management and it is they who must bear the responsibility of returning the money taken by way of deposits.


The observations of the EOW and the forensic auditors was one of the major reasons for the petitioner's success in their Writ petitions. The important point of arguments extended were:

  • The investigation conducted by EOW revealed that the entire trail of monies lost by the investors/trader have been traced to the 24 defaulters and their group companies and associates, and conversely no part of the alleged deposits has been traced to the Board Members of NSEL or to the petitioner as a promoter of NSEL.
  • The auditor in his report dated 24th February 2018 has clearly reported the names and amounts due from the 24 defaulters to whom the complete fraud amount of Rs.5600 crores can be traced.
  • EOW has not focused itself on the said forensic reports of the companies which have traded on the platform of NSEL and have huge outstanding amounts pertaining to its trade obligation as on the date on which the transactions on NSEL were stopped, and the audit reports have fixed the liability on these companies based on the pending buying contracts.


The nature of transaction entered into by the NSEL

The definition of the term 'deposit' under Section 2(c) is an inclusive definition and it is deemed to have always included any receipt of money or acceptance of any valuable commodity to be returned after a specified period.

The court makes reference to the bye laws of NSEL and state that the bye laws in great detail set out the procedure of the nature of transactions taking place on the platform of NSEL, and clearly articulate the rules for clearing and settlement of transactions, creation of a Settlement Guarantee Fund (SGF), client protection fund and also contains a clause for conciliation and arbitration in clause 3.1.2. The byelaws were made applicable to all the members and participants of the exchange, authorized persons, approved users, clients and all entities involved in trading, clearing and settlement of transactions to the extent specified therein.

The court went on to observe-

"Perusal of the mechanism clearly divulge that NSEL was an electronic trading platform for purchase and sale of commodities by registered trading members (and their client nontrading members) and the settlement of such contracts by payment from the buyer and seller through the exchange and the sell/delivery of the commodity by the seller to the buyer. It aimed at facilitating the transaction between buyer and seller through its electronic platform in accordance with the rules, regulations and byelaws of the exchange. The byelaws and rules of the exchange were in existence since its inception and were within the public domain. The nature of transaction to be carried out on the NSEL platform was also therefore, in public domain since the trading on this electronic platform commenced. The business/transaction which operated through NSEL, do not disclose any payin amount received by NSEL in its own right but it was only received in the process of settlement of the commodity trade and only for the purpose of passing it on to the selling trading member on the same day."

Amount received by NSEL not 'deposit'

The High Court held that Section 2(c) of the MPID Act which contemplates a 'deposit' to be a receipt of money or acceptance of a valuable commodity on the promise that such money or valuable commodity would be returned / repaid by the financial establishment after a specified period or otherwise, cannot be interpreted to include the financial transactions facilitated by NSEL.

The commodities contracts entered on the platform of the exchange were against the payment of the purchase price/pay-in amount who received a VAT paid sales contract from the seller for the commodity sold and purchased. The buyer was accordingly aware of the seller to whom the price amount had been paid through the exchange settlement mechanism and in fact, NSEL performed the same role qua commodity trading as the Bombay Stock Exchange.

The trading on the platform of NSEL did not involve it in the capacity of recipient of the trader's money with an obligation to return on maturity. The transaction was in the form of trading through the NSEL platform, and this was in the knowledge of all the traders on the platform. The state was unable to establish that the money used in making these trades was in any way deposited with NSEL. The money was never deposited in NSEL's account, and the commodities were not retained/in possession of NSEL.

The Respondent's arguments of NSEL receiving the commodities and issuing warehouse receipts (which were found to be fictitious at a later stage) in return, which was evidence enough of 'deposit' under MPID Act was not accepted by the High Court, as there was no assured return, and the commodities that were accepted were on behalf of the purchaser, and it wasn't a simple transaction of accepting the commodities as deposits.

Shortcomings in the FIR

The allegations in the FIR filed by one Mr. Pankaj Saraf, who was himself a trader on NSEL, are noteworthy. The complainant alleged that he was cheated by NSEL, the defaulters and there was practically very little hope for recovery of the amount due and outstanding on the contract, which he had invested in NSEL. He also alleged that NSEL has cheated him by creating a false impression of being a proper spot exchange with correct risk management systems, in order to induce him into trading on the spot exchange, and deliberately misled him into believing that the trades were backed up by genuine warehouse receipts. In fact, the loss could not be recovered since the funds from the SGF of the exchange was misappropriated, leaving no security to ensure payment of his outstanding amount.

A statement is made in the said complaint that after discussion with various investors and from the reports published in the newspaper, he had gathered that the accused persons named in the FIR had defrauded 13000 investors to the tune of Rs.5600 crores or more. The Court observed that the complainant has stated in the FIR that the trading which he was carrying on the platform of NSEL was successful till the time when the embargo on trading was imposed upon NSEL.

After a thorough perusal of the FIR, the High Court went on to observe that the FIR does not allege that any amount was deposited with NSEL, and on the contrary he has averred that NSEL was a medium through which he entered into transactions through his broker. The allegations made were of criminal breach of trust, cheating and fraud, which are covered under the Indian Penal Code (IPC). There is not a single allegation of promised returns made by NSEL through these trades.

The constitutional validity of the Maharashtra Protection of Interest of Depositors Act, 1999

The High Court accepted the arguments of the Respondent, and decided not to dwell upon the constitutionality of the assailed provisions of the MPID Act, after the position has been settled in K.K. Baskaran v. State (2011) 3 SCC 793.

EOW Charges

The High Court on close perusal of the charge-sheet filed by the EOW, Mumbai notes that even the EOW has "no doubt" that the NSEL was operating as an exchange, and at most could be charged with failure to abide by their bye-laws, and NSEL should have declared the defaulters and initiate proceedings against them. However, the High Court notes that after a letter from the Forward Markets Commission (FMC) asking NSEL to explain which members had failed to discharge their pay in obligations, and why they had not been shut down, NSEL had in fact clarified their position which itself had featured as a part of the charge-sheet.

IPC Charge

Another very interesting note made by the High Court is that it does not absolve NSEL of all liability, and their conduct may make them liable under section 465, 467 of IPC for forgery. This comment is made in the backdrop of allegations in the charge sheet that on August 01, 2013 the exchange had SGF of 738.55 crores. However, during the interaction with the Board of NSEL, it was informed that the SGF had only Rs. 62 crores. Furthermore, on further investigation it was found that the transactions were not supported with physical transfer of goods. In many cases there was a mismatch of accounts of NSEL and borrowers due to bogus entries made by either party to accommodate each other. It was also revealed on investigation that the warehouse receipts for goods of delivery that were submitted were fictitious and were a "ploy to disguise the nature of the transaction". However, the High Court chose to focus on the sole question as to whether 'deposits' were made for the purposes of section 2 of the MPID Act.

Lapse in the EOW's course of action

The Court perused the forensic report of the 17 defaulters, which in great detail had computed the outstanding trade obligations based on pending buying delivery obligations, working out their respective liability. The report had analysed how these companies had transferred funds to their sister companies and failed to discharge their obligations, causing losses to the investors. This report followed the money trail, and the Court was "really surprised" that the EOW has not focused itself on the said forensic reports of the Companies which have traded on the platform of NSEL, and have huge outstanding amounts pertaining to its trade obligation as on the date the trading on NSEL had stopped. The calculations reveal that properties for Rs. 1720.63 crores of due amount had not been attached.


The judgement by the Bombay High Court is logical and rational in its interpretation, and another stellar example of blanket powers exercised by law enforcement agencies, without application of mind, beguiled by the support of the media. The High Court has compartmentalized the issues in a very tactful manner by stating that although other criminal provisions may apply, the specific provisions of the MPID Act allowing for attachment need reconsideration in the present case.

What is pertinent to note here is that the proceedings against NSEL are not just limited to criminal proceedings, but also involve a large sum of money that requires recovery from various persons/companies, and thereafter this money needs to be handed over to the rightful persons whose trades could not be settled due to the embargo and default by the 24 major defaulters. Apart from criminal proceedings that require justice to be served, it is of utmost importance that these funds be brought back to their rightful owners. These frivolous proceedings of attachment have not only created an impediment in such settlements, but have also needlessly protracted them¸ thereby causing a loss in the time value of money.

This judgement sets the clock back in time, and allows NSEL an opportunity to strongly defend itself in other proceedings, and hopefully return the defaulted amounts back to the rightful persons.

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