B.C. Gupta ORDER
1. The complainant, the Bombay Stock Exchange Limited (hereinafter referred to as 'BSE') is a company duly incorporated under the Companies Act, 1956 and is a recognized Stock Exchange under the provisions of Securities Contract (Regulation) Act, 1956. The complainant obtained a Default Insurance Policy form the opposite party (hereinafter referred as 'OP'), the New India Assurance Company Limited, with purpose to provide indemnity cover against losses incurred/caused due to settlement at stock exchanges for defaults, committed by the members of the complainant. The said policy provided insurance cover for the Trade Guarantee Fund (TGF) of the BSE for the period 25.01.2001 to 24.01.2002, and a sum of 1,39,12,500/- was paid as premium by the complainant to the OP for obtaining the same, vide cheque No. 022189 dated 24.01.2001, drawn on the Bank of India, Stock Exchange Branch, Mumbai. The Policy covered members of the BSE, as on 31.01.2001, and a list of such members has been attached to the Policy.
2. The main issue involved in the present case is that two members of the BSE, namely, Orient Shares and Stock Brokers (hereinafter referred to as "Orient"), and Share-Deal Financial Consultants Private Limited (hereinafter referred to as "Share-Deal"), whose names appear at serial No. 162 and 665 respectively of the list of members attached with the Policy, and whose membership numbers are 180 and 794 respectively, made certain defaults in making payment of their settlement obligations during settlement No. 50 & 51. The complainant utilized funds from the Trade Guarantee Fund (TGF) for a sum of 14,22,56,540.80/- to meet the settlement obligations of these members, which was further enhanced to 14,66,83,742.68/- for two subsequent payouts. These funds were utilized from the TGF, without formally declaring the two brokers as defaulters. The erring brokers were also given an opportunity for clearing their outstanding liability within a period of three months. However, on their failure to do so within the period allowed, they were formerly declared as defaulters and the process to dispose of their assets/securities etc. was undertaken. It is stated that by that time, the value of those assets/securities diminished in the market and hence, the complainant was put to loss for which they filed claim with the OP under the Policy. The OP Insurance Company have raised the contention that the complainant should have first declared the two brokers as defaulters in accordance with their own byelaws in force at that time, and only then, the payment could have been made from the TGF. Moreover, if the process of disposal of assets/liabilities of these brokers had been undertaken at that very time, it would have fetched a better amount than that was realized later, and hence, the liability of the insurance company would have been offset by that amount.
3. The case of the complainant is that the Securities & Exchange Board of India (hereinafter referred to as SEBI) addressed a letter to the complainant on 07.03.2001, on the subject "amendment to various byelaws of your exchange relating to TGF. " This letter was sent after considering the proposal made by the complainant BSE in their letter dated 19.02.2001 addressed to SEBI, according to which they had proposed that instead of declaring member as defaulter, and then providing funds to complete the settlement, timely assistance by way of temporary refundable advances from the TGF may be given to the members, who were facing temporary mismatch and were unable to meet their commitments, obligations and liabilities to the clearing house of the exchange. The SEBI stated in their letter dated 07.03.2001 as follows:--
"The proposed amendment to provide for the temporary refundable advances from the TGF is not considered favourably by SEBI. However, as a investor-friendly measure, it has been considered that TGF may be utilized for meeting the commitments, obligations and liabilities to the clearing house of the Exchange without declaring the member a defaulter in the same manner as in the case of NSCCL. Towards this end, the Bye-laws may be amended on the following lines: